Household Budgeting Made Easy

Budgeting is the cornerstone of personal finance. You can't make a rational financial decision without knowing the state of your cash flow. But if you've never developed a budget, working up a detailed one can seem like a daunting task. So many people don't — and then get into trouble.

Fortunately, budgeting doesn't have to be complicated. If you are living within your means — with no debt or only low-interest debt that is easily serviced — then a simple budget can suffice for planning purposes.

How to build a basic budget
To develop a simple but accurate budget, assume for the moment you spend the “right” amounts on detailed subcategories like clothes, food, entertainment, etc. (I'll come back to the situation in which you may not be spending the “right” amounts.) Then ignore these detailed subcategories and build your budget at a coarser level based on your paychecks and bills.

If you've kept your paychecks and bills or have access to them online, this process is easy. Take a representative set of them — perhaps those for the past 3-6 months — and write down values for average payments, as illustrated in this spreadsheet.

To make things simple, when entering your paycheck amount, use the amount you receive net of all deductions (e.g., for state and federal taxes, health, disability, life insurance, 401(k) contributions, and so on). That is, use the amount you actually deposit into your account.

Also, enter a representative amount for your credit card bills. Do not drill down into the bills to allocate payments by type (food, gas, clothes, etc.). You don't need that level of detail for this type of budget.

The accompanying spreadsheet includes the items in my simplified budget with fictional but representative figures and frequencies. Your list may differ. If you spend a lot of cash or make many check or debit purchases, you may need entries to account for those. Since I pay almost everything by credit card, I left out cash and check payments.

Be sure to prorate everything to the month and total it. If the total is less than zero, then you have negative cash flow. That's a sign you need a more detailed budget to get back on track. This is the case for which seeing the details will help. You're spending too much somewhere and you've got to figure out how to cut back. The simple budget I've just described is not sufficient for this purpose.

If your total is positive, that shows how much you have left to save for the future. You can use that average monthly savings figure to predict how long it will take you to save up for some goal (new car, vacation, etc.).

Nothing to it
That's it. We're done. Was that hard? I don't think so. Yet, we now have a budget that is perfectly adequate for a variety of investment planning purposes. It lacks detail, and if that bothers you then go ahead and build in more. It won't hurt to have it. It just takes more time and effort to develop a more detailed budget.

If the challenge of building a detailed budget is preventing you from budgeting at all then try the simple budgeting approach first. It may be the only budget you need — and the best investment you'll ever make.

More about...Budgeting

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Aleks
Aleks
10 years ago

I’m not sure I see the value of something this coarse, even as an investigative tool. Right now it breaks down all the fixed expenses and leaves everything else lumped together under “credit card”. That seems backwards to me. Even if you’re not trying to control spending and just want to see where the money is going, it’s not telling you anything useful. All of the actual decisions you make about spending have been amalgamated into that one amorphous blob. If you want to see whether you eat out too much or spend too much on your hobbies, it’s not… Read more »

Nicole
Nicole
10 years ago

I have to say that it seems to me I do this calculation every month at the beginning of the month when I do bills and get my paycheck. If I have to pull money from another account, I’m losing money, if there’s money leftover I’m saving money (and technically I’m not a month behind because I keep a month’s salary in savings as an emergency fund). I don’t really need to sit down and write it out to get the above level of detail– I can do it in my head. I guess I should feel virtuous according to… Read more »

Kristin
Kristin
10 years ago

I think the value here is that this is one step in the right direction. One step may lead to more steps, which may lead to a detailed monthly budget, controlled spending, debt reduction, saving, and asset accumulation. You gain one important thing from this course budget–basic financial knowledge.

Eric Poulin
Eric Poulin
10 years ago

Starting with something so basic is a good start if you have nothing else… if you don’t have spreadsheet skills, something more intuitive like CalendarBudget is a great way to visually layout your budget and see exactly where your money goes.

Nicole
Nicole
10 years ago

I dunno, though, I could pass this test (and start working on the spending goal without making a detailed budget) with 0 retirement savings, since saving for retirement at work is taken out of the take-home pay. That could easily give a false sense of security.

Jay
Jay
10 years ago

I found this article a little bland and lacking in real financial value. I agree with Kristen above that it is a step in the right direction, but again doesn’t seem up to snuff for GRS. Here is what worked for me. For my budget I broke it down to correspond with my paycheck. I looked at all of my recurring bills (I’ll use electric in this example) and added up the last 12 months. This should be easy since the bill probably shows you the last year. I then divided that by 12 to give me an average monthly… Read more »

Dustin | Engaged Marriage
Dustin | Engaged Marriage
10 years ago

Our household budget is certainly more detailed and defined, but we’ve been at it for several years. I think it is most important to get started and have some parameters defined for how you will spend your money.

I also feel that a budget is one of the best, practical marriage tools there is. The process of working on your budget together, and then sticking to it, will go a long way toward developing strong communication skills and building trust in each other.

Mike
Mike
10 years ago

Im pretty good with Excel so I sat down with my wife and we have our budget all done, with cell refs and everything. She isn’t a big numbers person, she just wants to see how we are doing. So I built the spreadsheet to referance all the input that get exported from BofA every month. From there, we know exactly where we are at any given day. I have the detail that I want and she has the ease of use that she wants. It doesn’t matter if your budget is overly complex or as simple as keeping a… Read more »

Aleks
Aleks
10 years ago

Like Nicole, I already do this in my head and I don’t consider it budgeting. I just know about how much I can spend in a month, and track my Visa purchases throughout the month to stay under that amount. If I did this “budget” I would have five items on it: my paycheck, my automatic deposit to savings, my donation to my church, my rent cheque, and my Visa bill. The Visa bill is the only one that changes, and it includes everything from bills to groceries to restaurants and videogames. I use a spreadsheet to track my Visa… Read more »

Tina Fortune
Tina Fortune
10 years ago

I have been living on a budget for many years and am so glad that I took control of our finances a few years ago. I use a simple budget, including the envelope system, and as a single mom of 3 have done extremely well. I believe that our success is attributed to putting out money in categories and then spending what is in the category instead of going to the granular level. I tried recording receipts, etc. and just found it to be to time consuming. Thank you for providing the info. Great info!

Sara
Sara
10 years ago

I have to agree with those who said that this isn’t detailed enough to be very useful as a budget. I don’t think it’s a good idea to lump all your day-to-day expenses together as “credit card,” because it seems like the idea is to spend without really paying attention and wait until you get your credit card bill to see how it compares with your income. If you realize at that point that you’ve overspent, it’s too late. This could be useful to someone just getting started with budgeting for getting a big picture look at income and expenses,… Read more »

DC
DC
10 years ago

I think the most important issue here is that people at least begin to build a budget, whether it’s detailed or not. At the very least this will put a person in the mindset required to really consider what it is they do with their money every month. Yes, the article was a little lacking in the financial details department, but it was clearly geared towards those who do not have a budget. Making any kind of budget or any attempt at managing money is better than doing nothing, and I agree with Mike when he says you have to… Read more »

Tyler Karaszewski
Tyler Karaszewski
10 years ago

I still like my own simple budgeting system better than this one. It works like this:

1) Get paid.
2) Contribute to savings goals/debt repayment.
3) Pay your monthly bills.
4) Do whatever you want with the rest.

To be successful, your checking account balance needs to remain positive. That’s it. No spreadsheets required. No credit cards required. This works great for me.

KM at Long-Distance Life Blog
KM at Long-Distance Life Blog
10 years ago

It seems to me that the whole point of doing a budget is to see where your money goes–how much is going toward food, entertainment, etc. That’s why, I think, most people would say “we need to sit down and make a budget.” And in that case, the budget described here is not helpful.

I also find the example kind of disheartening and almost insulting, as someone who brings in much less income than the figures given above. I’m sure my budget would be “easy” too if I were pulling in $6,000+ a month.

Wojciech Kulicki
Wojciech Kulicki
10 years ago

Our family has tried these types of “course” budgets for simplicity’s sake before and they never seem to work for us. A budget is just easier to put together when you can see, for example, the specific amount being taken out for the car insurance bill, and to work to reduce that specific amount as much as possible. True, a general look at your budget is helpful, but I don’t think it works in the “building” stage, just in the “review” stage. A good piece of budgeting software (even a free one) should be able to set up groups of… Read more »

John
John
10 years ago

Question for April…How would this type of simple budget help someone find where they can cut expenses? Sorry to say this J.D., but I’ve been unimpressed with April’s posts since she has joined GRS. This one is one of the worst, not up to snuff for what I’ve come to expect on your blog.

Lynette
Lynette
10 years ago

This is a post by Austin Frakt, not April!

Bon
Bon
10 years ago

John (#16)

The author of this post is named Austin, not April

John DeFlumeri Jr
John DeFlumeri Jr
10 years ago

So often people who are in financial trouble won’t prepare a budget, they are afraid of facing the truth on paper, or they do a “false budget” to minimize the truth.

John DeFlumeri Jr

Austin Frakt
tie
Austin Frakt tie
10 years ago

It is evident that many who commented do not see the value of the type of budget described. I contend that it is better than no budget. Moreover, if you follow the final link of the post it takes you to an investment planning series that shows you very specifically how such a budget can be put to use.

If you need to track details, those can be added. But they are not necessary for many purposes.

Brian
Brian
10 years ago

This is a coarser version of what I use and it has a lot of benefits. If I tally up all my monthly expenses / saving / tithing and I’m left with just a couple hundred dollars a month, I know that I am cutting it too close. The advantage of this method is that it gives you X amount leftover that can be spent on whatever you want, without worrying if you’ve already spent $25 of your monthly $30 for entertainment and this $7.50 movie will put you over budget OH NOES!1!. The disadvantage is that unless you control… Read more »

Dave
Dave
10 years ago

I’m with Tyler#13
And he says it all in 4 lines, done. thats simple.

Brian
Brian
10 years ago

As mentioned by a few posts already, the point of this is a step in the direction of basic budgeting for those that are not in a mindset of doing so. I started doing a basic one with an excel spreadsheet not too long ago and have since found Pear Budgeting’s excel template. It’s still floating around on the web. They’ve since moved on to an online based system, and seems to be better looking than Calendarbudget which was mentioned earlier in the posts; cheaper too @ $3/month. I still think their spreadsheet is great (and free) for those that… Read more »

mimms
mimms
10 years ago

My, my but we are the budget snobs, aren’t we? Now personally, my budget is in a series of linked excel worksheets projected monthly between now and my latest potential projected retirement date (2032). And I include detail down to things like biennial vehicle registrations. But I started 15 years ago with something like this. Frankly, this was probably a few steps more sophisticated than what I started with, as I only did it when I was afraid I was out of money and I did it with a pen and paper. Or a pencil and paper if I was… Read more »

Doug_CO
Doug_CO
10 years ago

I use a spreadsheet not too different from Austin’s which allows me to see what my finances will look like in the coming month. I found that just entering recurring bills, credit card payments, and occasional quarterly or semi-yearly bills was really all I needed to budget my money for the month. This really helped me when I was paying off loans such as my car, etc. I could choose to send a big payment in to pay down or pay off a loan and this course budgeting process helped me figure out how much I could afford to send… Read more »

LM
LM
10 years ago

It is amazing to me how many people equate budgeting with root canal or something like that! I know of friends that don’t budget because they basically look at their checking account and if they have money it means they are within their budget :-0 Although like the author I also use Excel to track my budget and also use MS Money to track my portfolio the reality is that many people that want to budget will see a spreadsheet and their eyes will glaze over. The reality is that this process can be done by hand on a notebook… Read more »

Tracy
Tracy
10 years ago

Mimms, thank you so much for speaking up. I am one of those basket cases that thought this post was a simple way to get started doing what I should have been doing all along. At least, that’s what I thought initially. Then I started reading the comments. The more I read, the more I became convinced that I was just a simpleton for not realizing the “emperor had no clothes” and that A. Frakt’s budget suggestion was worthless. But, as it turns out, this is just the kind of advice I was looking for: something very basic that even… Read more »

LM
LM
10 years ago

Tracy, I think you nail it right in the head because for budgeting to be effective it needs to be done regularly and in order to do that it needs to work for YOU not me.

That is why you need to find something that works for you. If that is writing down your expenses in a notebook so be it as long as you do it regularly.

The bottom line on budgeting is making sure you spend less than you make. So however you achieve that so be it…

Thirtysomething Finance
Thirtysomething Finance
10 years ago

I’m also experiencing some bugs. I can’t either of my banks (both household names) to update with current information, nor can I get one of my student loans to update. And for my student loans, the numbers don’t appear to be accurate — in fact, some of my loans are being listed twice (maybe once for the initial amounts and once for what’s currently owing?). This makes me want to just stick with my old approach of using Quicken on my Mac at home…though I’d love to be able to have all the flexibility of Quicken on my Mac, but… Read more »

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