In baseball, we use a scorebook to measure and track performance. In court, we have a stenographer taking constant notes about who said what. With personal finance, we have a budget to track our net income, spending, and saving – and you’ll see a real-life example of a budget today.
After all, a budget is your key to measuring data in personal finances.
Below, Jesse from Best Interest shares some information on budgeting, including a detailed look of an example of how he creates and manages his personal budget.
Budget Basics
When I surveyed other financial writers, I realized that every sample budget falls into three major categories:
- There are some people who only plan for future expenses
- There are some people who only track past expenses
- Then there are some people who do both
Most personal finance glossaries call the future looking action “budgeting,” and the past looking action “tracking.”
You budget before you’ve spent the money, and then you track after you’ve spent money. Many people (myself included) use the word budget to generally mean “measuring your money.”
Below, as I walk through an example of a budget, I’ll try to keep the definitions clean and separate budgeting from tracking.
My Budgeting Philosophy: Measure and Manage
A number of my articles reference this holy grail quote from Peter Drucker: you cannot manage what you do not measure.
Managing
In this context, managing refers to having control, being in charge, and continuous improvement.
When you see someone successfully managing their personal finances, they’ve got in all under control. They know what their money is doing, they’re looking for ways to reduce waste, and they are saving up for the special expenses in their life.
Those who manage their money don’t miss credit card bills or overdraft their checking account. They’ve got a 3-year plan for moving out of their apartment and buying a starter home.
Oh, and they know what a Roth IRA is (I thought it was a lawyer in the Yellow Pages…).
Measuring
If we’re to believe Mr. Drucker, then the act of measuring is essential before we can successfully manage.
You need data. Lots of data.
How can you be under control if you don’t know where your money is going? How can you reduce waste if you don’t know how much you’re currently wasting? If you want to save for next year’s vacation or make a debt repayment plan, how will you keep track?
The answer to all these questions: budget and track.
Example of a Budget: How I Measure and Manage my Money
If you’re just starting your money measurement journey, there are a couple of schools of thought. One idea is that you ease your way into it. I’ll discuss a couple of ways to do this later
For now, I recommend you make a serious effort to budget and track all of your dollars.
Using the YNAB App
Personally, I use the app YNAB, or You Need A Budget.
Though, PocketSmith is another very similar app that you can consider as well.
YNAB creates a digital envelope system (I’ll discuss this later) that should be used for both budgeting and tracking. The app has some “core rules” and a lot of supporting literature (how-to’s and videos) that make learning the process easier.
Though, there is a catch – YNAB costs $85 a year!
That feels…lame. Why would I spend money on something when the whole point is saving money?
Well, there are a few good reasons. Three to be exact.
Reason 1: The Free Trial
For one, YNAB has a 34-day free trial to let you dip your toe in. No strings attached.
This gives you the opportunity to at least try the app and ensure it will add value to your life before spending any money.
Reason 2: Earning the $85 and Then Some
Second, unless you’re already a budgeting, tracking, and spending master, you will more than make up for the $85 “loss.”
You’ll realize where you’re out-spending your limits and pull where you can pull back spending.
You could also find that your old gym (or magazine subscription, or pet grooming service, etc.) is still charging you! What the heck?! At least you now know…
Reason 3: It Can be a Learning Tool
Last, once you learn the “YNAB Rules,” it’s pretty easy to break free and try a different system on your own (for example, an Excel budget spreadsheet).
The largest benefit that I’ve gleaned from YNAB is behavioral. You don’t have to spend $85 forever. You can learn the good behavior, and then try it on your own for free.
Trim is another tool (that’s free) that can help you save money on your monthly expenses that are underused!
Why I Track Every Single Dollar
Yes, I budget and track all of my money in YNAB, and I’d recommend something similar if you’re new to money measurement.
Why?
A very common issue (in personal finance, and elsewhere in life) is ignorance of the unknown. Said more colloquially, “you don’t know what you don’t know.”
If you choose a method where you only budget a few categories of spending, or you only track some money, then you’re leaving behind huge question marks in your financial situation.
Remind yourself, why are you doing this in the first place? To sure up question marks! Remember Mr. Drucker’s words: you cannot manage what you do not measure.
If you are new to this, then a system that only “eases you into it” might just be a half-measure. It’s like a diet that says, “Eat a healthy breakfast, and then do whatever you want for lunch and dinner.”
It’s not a bad start, but there’s a lot of room for bad spending habits to creep in (like going into credit card debt!). You may need to take a more detailed approach when making your household budget.
Your Other Options for Budgeting
Multiple Systems for Tracking
Clearly, I’m YNAB biased, but my budget example is not your only option.
Even if you choose to use a different money measurement system, I think you should try to be complete in your budgeting and tracking behavior.
I know a few people who use PocketSmith, Personal Capital, or even a simple budget template in Excel. If building your own spreadsheet is intimidating, I’ve seen plenty of cool looking Excel or Google Sheets files on Reddit to start with.
There are many different ways to accomplish this goal. Heck, why not use a pencil and paper?
As long as you accurately and completely measure your data over long periods of time, you’ll be able to make smarter management decisions. Simply put, you’ll be better for it.
The Envelope System
The Envelope System is a 2-in-1 budgeting and tracking system.
Back in the day, an Envelope’r would literally deposit money into various envelopes that are earmarked for specific expenditures. Say, $300 for Groceries and $100 for Fun Money.
This is budgeting.
If you make a trip to Trader Joe’s, you’d grab money from the Groceries envelope. When you went to the movies, that money came from the Fun Money envelope. If there’s no money left in Fun Money envelope…well, then you’ve spent your full allotment for the month and you’re not going to the movie until the first of the next month.
By measuring how much money you have in each envelope at the end of the money, you can then effectively track your spending.
The Once-a-Month Strategy
One great thing I learned from my previously published budget survey is that once folks learn the basic rules (e.g. the YNAB system), they can successfully transfer their good habits to a simpler system where they budget every month, but just once a month.
For example, multiple people I know simply check their bank account once at the end of each month. By comparing this month’s balance to last month’s balance, they get a “big picture” view of their spending. They essentially have a monthly budget.
They don’t care so much about the $300 on Groceries or the $100 on Fun, but instead care that they spent $2,500 total this month. Over time, they learn what they typically spend money on, and they know when they’re being a little too loose with their wallet.
It’s a once-a-month tracking-only system.
Others utilize a once-a-month budget-only system. These people use the classic personal finance advice “pay yourself first.”
They take, say, 40% of their paychecks and deposit that money into investment accounts and long-term savings. The remaining 60% of their money goes into a spending account, where they are free to spend the extra cash flow how they like.
It doesn’t matter what they spend it on, nor does it matter if they spend all or part of that 60%.
Why?
Because they’ve already taken care of their long-term needs by saving up front. The 60% is budgeted for spending, and so spending it on anything is perfectly ok.
Despite various levels of experience and expertise, I found that each and every one of the financial writers I surveyed did some form of budgeting and/or tracking.
Nobody chose “nothing.” Everyone had some sort of budgeting plan.
In this space, ignorance is not bliss; ignorance is stress!
In Summary: A Real Life Example of a Budget
While I’m not quite at the point of adopting these once-a-month systems for my own budget, I love how they sound in practice. They’re both so easy.
If you’re confident in giving yourself a longer leash (i.e. not measuring each transaction), this system still captures the most important data points.
Keep in mind, however, that these “once-a-monthers” often had years of experience using more detailed systems, like YNAB. Only after building solid habits did they break free into a simple budget (and even then, they still check-in every month). That’s why when sharing my example of a budget I recommend a similar path for new budgeters out there.
Budgeting is a terrific practice to get into to help you achieve your financial goals. It’s truly one of the pillars of personal finance, and it’s an easy way to build more confidence and control over your life.
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