I’m not going to lie: budgeting and tracking your spending really aren’t sexy or fun. I’ve heard lots of complaints: it’s annoying, it doesn’t really help, and it’s tedious to track where every dollar is spent. But if you have debt, are constantly out of cash, and don’t know where your all of your savings have gone, tracking your spending is, by far, the most effective way for solving these problems.
You may have tried this before and lost interest or the desire to budget after a short time (I’m guilty of this, too). A common misconception is that you have to launch an all-out assault on spending by obsessively documenting every single financial move you make. This is simply not true! Before you complain how you don’t want to enter every receipt into QuickBooks, realize that there are other, simpler options out there to get you on the right track.
Here’s my approach to creating a quick and simple budget that you can manage on less than 5 minutes a day.
1. Track income and spending in 4 categories.
The object of this isn’t to set up a system and then ditch it when it’s too laborious to work with. Instead, start simple. Create 4 columns in a spreadsheet (I recommend using Google Docs) or notebook with the following headers:
3. Fun and Entertainment
4. Investments and savings
Here’s a spreadsheet I created in Google Docs that you can use by saving your own copy (click File then “Make a Copy”). I prefer Google Docs because I can access my spreadsheet from any laptop or phone with an internet connection.
You can set get more detailed with your tracking if you’d like (see step 5), but hold off at this point if you are just starting out.
2. Place each money transaction into the appropriate column.
Do this at least once a day (so you don’t forget to add things). Use one line for each transaction.
“Income” is simply any money you receive over the course of the month, either through paychecks, money owed, or other sources. Any money coming in should be counted.
The “Necessities” can be anything that’s a necessity for you to live: rent/mortgage, utility bills, gas/car expenses, groceries, medical expenses, personal care supplies.
“Investments and savings” is any money that you move to a savings or investment account from your checking account. This could be for an emergency fund, retirement account, or any other money you don’t plan to spend immediately.
“Fun/Entertainment” is anything you spend money on that doesn’t fall into the “Necessities” column. This may include going out to eat, seeing a movie, or buying a DVD.
Rule of thumb: if you aren’t sure if it goes under “Needs” or “Fun”, it’s probably not a Need. Be as honest as possible with this step; it’s meant to help you figure out where your money is going.
Write a short description with each entry to give some detail about how the money was spent, such as “lunch at Chipotle” or “book on Amazon.com.” If you find it annoying to add every single little detail, then don’t.
3. Check the totals on the last day month.
This can take as little as 5 minutes if you don’t want to spend much time on it. Your focus is on where your money has been spent and determining if you’re overspending in certain areas.
4. Use last month’s spending to set some simple budgets for your next month.
Chances are your numbers aren’t right where you want them to be if this is your first month, and you may have spent more than you think you should in the “Fun” category. That’s okay. The goal here is to figure out where your money is flowing and to adjust spending accordingly. The “Fun and Entertainment” category is where you should pay most attention. “Necessities” should be fairly fixed cost, month-to-month, and you should have monthly savings and investment goals in mind, too.
Be realistic in setting your budget. If you spent $1,000 on entertainment last month, don’t expect to drop it down to $100 the following month. Instead, bring your spending down gradually, such as from $1,000 to $900.
Repeat this process each month by continuing to track your spending and updating the budgets as necessary.
5. Optional – Move on to more advanced tracking of expenses.
Personally, I have a spreadsheet with about 50 cells to track spending. It’s available as a GoogleDoc template called “Personal Monthly Budget“. I’ve been doing this since September of last year and noticed a number of trends right from the start. Spending $100 a month going out to bars with friends is something I need to reduce when it’s eating up 10% of my income.
Before you dismiss this tracking plan, just give it a shot (even if it’s only for a week). It’s a small step to take that may save you thousands of dollars in the long run. I know it isn’t fun, but it’s truly an effective way to keep track of money and get your finances on track with little effort.