Ok. So you’re starting your budget. Or you’re looking to simplify your current budget. What now? What overarching ideals should you be following? Here are 7 different things I think you should focus on with your budget. Some are more strategic. Some more tactical.
Just enough categories. Too many categories and you’ll burn out. Too few and you really aren’t tracking your spending at a low enough level. As a rule of thumb, I recommend starting out with fewer categories. Food, entertainment, and personal spending maybe? Those are biggies in my house.
The right categories. Track categories which you are in your immediate control and which will have the biggest immediate impact. I don’t think you need to track specific details within a budget category. For example, it may not be necessary to track how many TV dinners you buy within your food budget. Unless you think an item might be driving your costs in that category.
A tracking system. You don’t necessarily need Quicken or Microsoft Money, although having either one will greatly reduce your accounting complexity. A simple spreadsheet will do. You need a way to track what you planned to spend versus what you actually spend from month to month.
Flexibility. Don’t stick with a budget category if you think it’s not offering any value. Drop it and consolidate or rename the category. You created the budget. You can change the budget. Some categories are the same amount month after month. There’s no sense in tracking a category unless something major happens which causes an adjustment.
A budget transition. In addition to tracking your spending, you want to be able to transition your tracking from month to month without too much hassle. If you’re using a spreadsheet, tracking a year (12 months) is plenty. You’ll create the history you need without having to dig too much.
Simplicity. I’ve seen some budget spreadsheets that would make anyone’s head spin. Just because you can add a feature, does it mean you should? A basic spreadsheet should have three columns—category, planned, actual. Once you get the hang of it, then adding other tracking features won’t make your head spin.
An early warning system. Not only should a budget help you see where your money is going, it should also act as an early warning system. It’s a simple percent spent. If it’s half way through the month, are any categories over 50% spent? This will only be effective on variable spending categories. You may be 0% spent on housing the whole month and the 100% on the 31st. This isn’t a hard and fast rule. But it can provide a nice pre-fail system.
I’d love to hear what principles you follow with your budget. Are you a spreadsheet genius with all kinds of bells and whistles? I’d love to hear about it.