What comes to mind when you think of budgeting? Some ideas that come to my mind are: restrictive, hard, impossible, deprivation, unflexible, and no-fun.
For those exact reasons, I have decided not to budget. This doesn’t mean that I don’t have a plan or know where my money is going, I have just found a slightly different method that works better for me.
I have developed a pretty simple process that you should consider if you want to better manage your money:
1. Sign up for a service like Personal Capital or Mint.com
I love and use both of these services for different reasons. Although both platforms are more than capable of tracking expenses, I prefer Mint to Personal Capital in this specific area. I find the platforms to be complimentary and recommend setting up accounts for each, especially because they’re free. In this article I’ll walk you through my process using Mint.
After you sign up, Mint has made it very simple to add your accounts. By adding your various account credentials into Mint you give them “read-only” access to your accounts. Mint has many security safeguards in place to keep your money and data secure.
Once you have your accounts linked up you just live your life as normal and let Mint do its thing.
Mint will display all of your transactions (so long as they’re done using a card or account hooked up to Mint) and will automatically attempt to categorize them. Sometimes it does a good job, other times, not as much, but it’s simple to update the category, and Mint will continually improve the longer you do this.
2. Setup your “Budget”
I know I told you I don’t budget, but that’s not entirely true. We all have fixed expenses that will be nearly identical month to month, for example, mortgage, rent, car payment, student loan payments, cell phone, internet, cable, Netflix, etc.
Once you’ve been using Mint for just one or two months, it’s not difficult to see these reoccurring expenses and set up a basic budget. Here’s our budget as a reference point.
3. Add in the variable categories
Next, we are going to set up variable categories– or categories that fluctuate month to month. Examples of these would be things like groceries, gas, utilities, entertainment, discretionary spending, and other miscellaneous expenses. As I said earlier, you don’t have to add these immediately, but as long as you have been updating the categorization of your transactions you will start to get a feel for your spending.
I cannot overemphasize this enough, DO NOT OVERTHINK THIS!
You will have a little bit of data to look at soon enough and you can make some rough guesses. If you spent $400 on groceries during your first month using Mint, then enter that in! You are probably going to be wrong, but this is just a starting point.
You won’t budget perfectly every month, and that’s okay. The purpose of this exercise isn’t to depress you when you spend more on groceries than you initially planned on, it’s to inform you about your spending habits.
As you cycle back through steps 1-3, which is not a lot of work, your budget will begin to settle in on your natural spending behaviors. But there will still be those curveball expenses that happen to each of us that can’t be forecasted.
4. See trends emerge
Before you know it, Mint will be compiling pretty cool trends for you automatically. Here’s how our spending has shaken out over the past 12 months:
Without any work on your part, Mint is showing you where all your hard-earned dollars are going, in an easy-to-digest, visual format.
5. Time to make some decisions
As you see these trends start to emerge you will naturally begin to question, “do I really spend that much money on groceries?” “That’s my fast food budget?!” “I had no idea I was spending so much on Amazon!”
When you pile your spending data on top of the other trends that Mint tracks, like your net worth, you may start to wonder if it’s really worth it to spend as much in your “problem areas.” We all have issues and weaknesses when it comes to money, once you start to identify those categories it empowers you with the knowledge to take action
The fact of the matter is, it’s almost impossible to improve what you don’t track. My wife and I are more frugal than most, I just calculated our savings rate over the past 12 months based on our take-home pay (post-tax) and it was 70% on the dot. When we got married we were good savers, but not nearly to this degree. We have gotten to where we are today by following the steps outlined above and systematically eliminating spending we don’t truly value.
By following these steps, you will be in a much better position to ensure that your hard earned money is going toward things that will bring you happiness, rather than just mindlessly spending.