Three Ways to Put Your Budget On on Auto Pilot

Like the perennial search for the easiest, most effective diet, many of us are constantly on the lookout for a painless, profitable method for sticking to a budget.

Food and money have a lot in common: both are essential (you’d be hard pressed to live without either one), both constantly taunt and tempt us, and both carry a lot of emotional and psychological baggage.

Just as most diets boil down to eating better and exercising more, most budgets boil down to tracking what you spend and looking for ways to cut back, increasing your income, or both.

While I can’t make budgeting any more attractive than cutting out a daily snack of chips and soda, I can tell you that taking control of your spending will have similar rewards. You’ll feel lighter as you shed debt and stronger as your exercise your savings muscles.

Here are three approaches to making budgeting a little simpler.

1. Take Advantage of High-Tech Budgeting Tools

For many years, software you purchased, installed, and updated offered the best in high-tech money management solutions. Today, however, a variety of free online budgeting and money management programs have cropped up that not only give those programs a run for their money, but they’re free – allowing you to stretch your budget that much further!

Some of these on-line solutions offer customized spreadsheets that you can use to track and analyze components of your financial life, while others are web-hosted money management programs. With the web-based programs, you can log into your account from anywhere and manage your money in one place.

Most of the web-based services include a feature known as “account aggregation.” You provide the log-in information for your checking account, for example, and after that, whenever you go into your money management program, you’ll be able to see updated information about your checking account balance — along with the balances of any other accounts you have set up. With account aggregation, you need only log into the one service and you can review a summary of all your financial information on one page, or drill down into the details of individual accounts without logging in and out of each one.

Example from Mint.com

Why this approach can work: You can scrutinize your finances at a micro or macro level, set up categories that work for your spending, and track trends. (Has your fuel bill skyrocketed? Entertainment spending shrunk?) Once you have entered all of your accounts, it can be much faster to keep track of your budget with one of these programs than trying to track everything manually.

Drawbacks: Unless you use checks, credit cards, or debit cards for every single penny you spend, you will still have to enter your cash spending manually. Also, some transactions will require some extra work to make sure they make it into the correct categories (buying both groceries and clothing at Wal*Mart, for example).

Some people might also be concerned about the security of having all of their accounts accessible through one user name and password. But overall, research shows it’s safer to monitor accounts online than rely on paper statements. Just make sure you use a super safe password and change it regularly. Keep your firewall and anti-virus software up to date as well.

You can compare the different features of some of the most popular programs here. Choose a program that lets you enter your cash purchases; otherwise, you may miss out on a big chunk of your spending.

Tip: Before selecting one of these programs, talk to your credit union or bank to find out if they offer a budgeting/money management service. If so, they may offer to help you with the toughest hurdle – setting it up – for free!

2. The Low Tech Way to Budget Your Money

If you avoid turning on the computer more than you have absolutely have to, then a good, old-fashioned, low-tech method employed by many of our grandparents may be for you. It’s called the envelope method of budgeting.

Here’s how it works: As soon as you get your paycheck, you pay your essential fixed bills (mortgage, car payment, credit cards, utilities, etc.) and set aside whatever you have planned for savings or periodic bills (the quarterly condo dues, for example). The rest you take out of your account in cash and divvy it up among envelopes you have created for your spending categories: groceries, gasoline, clothing, etc. You leave the credit and debit cards at home and plan ahead so you can take the proper envelopes with you when you need to fill up the tank or hit the mall to take advantage of a sale, for example.

The biggest advantage of the envelope system is that it will keep you honest if you stick with it. You know how much you have to spend each month in each category, and when the money is gone, it’s gone. (Either you start scrounging in the freezer for dinner ideas because your grocery money’s spent, or you stay in on the weekend because you blew your entertainment money on a movie and super-sized popcorn.)

What if you want to try this method but don’t want to carry a lot of cash, or you want to still be able to make purchases with a debit or credit card? Then use the “virtual envelope” method. You still establish your spending categories and amount allocated for each, but you keep track of them on paper and make sure you stay within the limits. A check register such as those offered by the Budget Map ($29.95) or the University of Montana’s Check Register Tracking System ($1 for Montanans, $2 elsewhere) are useful for tracking your purchases and immediately seeing how much is left in each category – provided you are willing to at least carry a check register.

Although it’s not free, the Mvelopes program is worth a mention here because it takes the envelope method to a new level by combining the high tech tools of online budgeting and account aggregation with the approach of the old-fashioned envelope method. It’s very popular with financial advisors, who often recommend this program to their clients.

3. The Three Account Method

This method is as simple as setting up several different financial accounts and spending from them, rather than dumping your whole paycheck into one and trying to sort it out from there.

To get started, track your spending for a month or two in order to figure out how much of your paycheck is needed to pay essential monthly bills and recurring bills (annual personal property taxes of $240 a year, for example, would require you to set aside $20 a month.) Then set up three accounts: a checking account for monthly bills, a savings account for periodic bills and emergency savings, and another checking or savings account for your spending money. Chances are good that your bank or credit union will allow you to set up three separate accounts, but you may want to use a high-yield online bank savings account to separate your savings account from your spending accounts. (I’ll assume you already have payroll deduction for your retirement savings.)

Let’s say you find you need 45% of your after taxes/after retirement contributions paycheck to cover your monthly bills, 5% for recurring bills, and 10% for savings. The rest – 40% – must cover everything else, including fuel, food, clothing, haircuts, entertainment, etc. You can either simply spend up to that total each month using your debit card and cash, or you can “envelope” that money so you know how much you have to spend in each category.

Many employers offer direct deposit for paychecks. Some allow your check to be divided up into multiple accounts. If yours doesn’t, you can arrange automatic transfers to other accounts so you don’t have to worry about mixing up your money.

Essentials With Any System

For any of these programs to work long-term, there are a few essentials you will have to take into account.

A written plan: You must take the time at the beginning to create at least a basic budget, which means writing down your expenses so you can plan for them. In fact, it may take a month of writing down what you spend before you are even ready to create your budget, especially if you have been flying by the seat of your pants )financially speaking) up until now.

Cash tracking: As David Bach points out when he talks about the “latte factor,” we all have areas where we mindlessly waste money, and until those are addressed, our budget probably won’t move in the direction we want. Use something – a small notebook, one of the check registers, or even your cell phone’s organizer function – to write down cash purchases as you make them, or you will forget some by the time you get around to writing them down.

Tip: You can print a free debit or credit card sleeve with spending questions to ask yourself before you make a purchase.

A budgeting buddy: Get a budgeting buddy to listen and support you. Just as most successful dieters get someone on their side – a workout partner, their Weight Watchers group, or an online support group – you will often find you need a support system to stick with your financial challenges. Faith-based groups such as Crown Financial Ministries or Dave Ramsey’s Financial Peace University can be helpful. Or you can look for online budgeting groups and blogs. Either way, find someone sensible and encouraging who you can talk to when an unexpected bill or the urge to shop hits.

Allowances: If you have children, there’s no better gift you can give them than to help them learn how to budget. Working out an allowance and spending plan with them, setting them up on their own online budget program (they’ll probably get the hang of it faster than you!), and letting them learn their own lessons can save them a lot of grief as adults. Kid’s Wealth is also a terrific money management system for beginning budgeters and their parents.

Reality Check

With any of these methods, the biggest “a-ha” will be seeing where your money is actually going, not where you think its going. You may discover that your spending is more than what you earn, in which case requesting a confidential debt consultation is likely in order. And, just like a diet, if your first attempts to get on a budget doesn’t work, don’t give up!

Free Online Budgeting Tools

With so many good, free online budgeting programs available, your biggest challenge will be to just choose one… and get started today.

AceMoneyLite
http://www.mechcad.net/products/acemoney/index_lite.shtml

Buddi
http://buddi.thecave.homeunix.org/en/

Budget5000
http://www.Budget5000.com

Budget Master
http://www.walltechsoftware.com

BUXFER
http://www.buxfer.com/

Clear Checkbook
http://www.ClearCheckbook.com

GnuCash
http://www.gnucash.org/

Grisbi
http://www.grisbi.org/

Mint
http://www.mint.com

Mo.neytrack.in
http://www.moneytrackin.com/

MySpendingPlan
http://www.myspendingplan.com/

PearBudget
http://www.pearbuhow dget.com/

SimpleD Budget
http://dsbudget.sourceforge.net/

Wesabe
http://www.wesabe.com

Yodlee
http://www.yodlee.com

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