This guest post from Geoff Lennon is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes.
Though I've been a GRS reader since early 2007, I've largely been a quiet observer. I've often wanted to participate more actively in the discussion and community that J.D has established over the years, but for whatever reason, I never have.
But recently, when J.D. wrote about the Mint.com signup process, I finally felt I might have some unique insight to offer. In particular, it was his comment below that brought me to the keyboard to contribute:
The [Mint.com] Budgets section lets you, well, erect a budget to keep your spending focused. I haven't had time to play around here, so I can't comment on its utility. I'm hoping that Mint will allow me to put my beloved Balanced Money Formula (or some other broad budget framework) into use.
Since I use Mint for this very purpose — putting the beloved Balanced Money Formula into use — I wanted to share my approach in detail.
Finding the Middle Way
Prior to learning about The Balanced Money Formula on GRS, I regularly struggled to find the level of detail at which I should budget, a decision I know many of us deal with at some point or another. In my search to find “what works for me“, I flirted with the budgeting extremes.
When I started to budget, I tried to allocate and track every dollar I spent using very specific (read restrictive) categories. You probably won't be surprised to learn that this system quickly crumbled. Maintaining such a detailed budget took far too much time and didn't really provide me with much meaningful data for analysis.
On the other end of the spectrum, frustrated by failing in my first attempt, I completely stopped in my effort to track my spending…at any level of detail. This wasn't a very effective approach either.
When J.D. reviewed the Balanced Money Formula a while back, I saw it as “The Middle Way” of budgeting. It's not so detailed that your budget strains under its own weight, but it's also just structured enough so that it provides instructive data that can help you to course correct your spending and saving habits when necessary. (Hmm…The Middle Way of budgeting. Perhaps J.D. is my personal finance Buddha!)
As a quick recap from J.D. (who got this from Elizabeth Warren), The Balanced Money Formula suggests that “ideally, no more than 50% of your paycheck should be spent on Needs (and keeping them below 35% is best). Of the remaining amount, at least 20% should be devoted to Saving, while up to 30% can be spent on Wants.”
Finding the Middle Way with Mint
Since The Balanced Money Formula is tremendously flexible and easy to implement, you could certainly use an off-line method to manage it (e.g., Excel spreadsheet, ledger, etc.); however, I've found Mint to be a great tool for this framework, mainly because it automatically brings in my debit and credit card transactions for categorization, a major time-saver.
When Mint brings in your transactions, it works to automatically select an applicable category, often with mixed success. (Sometimes my monthly train/subway pass is read as Subway and posts as a Fast Food transaction!) However, if you have regular interactions with the same vendor (Gas Station, Grocery Store), you can apply rules such that a specific category is automatically, and more accurately, applied. Or, for more ad hoc transactions, you can manually select the appropriate category.
As for categories, Mint has many to choose from — perhaps too many. The image below doesn't quite do them justice, as each of the categories has a number of subcategories as well.
You'll notice that Needs, Wants, and Savings are not in the standard list of categories. As a result, you'll need to create them in order to establish your Balanced Money Formula system.
Creating new categories is easy.
On the Transactions tab, select a transaction and the “Category” drop-down. From the “Uncategorized” Category, select “Add/Edit Categories”, and on the following screen, select “Add a new category” to create Needs, Wants, and Savings, etc.
Once you've created your new categories (I also use a Giving subcategory to track my charitable donations), it's time to review your transactions and to bucket them accordingly.
A few caveats:
- I've found that the usefulness of Mint in categorizing your transactions is directly correlated to the percentage of your spending that is on a debit or credit card.
- Check transactions are also easy enough to manage. But if you primarily use cash, this process will be slightly more difficult (unless of course you keep detailed notes on your spending. I do not).
- Since I mostly use a credit card, I assume that any cash I get from the ATM is going to a Want and not a Need (probably not 100% accurate, but it's close enough for the Middle Way).
Once you've updated your transactions, for at least a month of historical data, you're now ready to review your spending against targeted budget levels. There are two ways to conduct this review.
Select the Trends tab and choose the Spending Graph (By Category).
At first glance, doesn't look so great, does it? One solid block of Uncategorized spending. Really useful, Geoff! Fortunately, Mint enables you to easily drill into the subcategories we just created.
Clicking the chart refreshes the data and shows your spending by Balanced Money Formula subcategory.
With this update, you can now quickly review your spending in the high-level categories and assess how well you're tracking to budget. As you can see in the above, my Savings are well on track this month; but then again, my rent check hasn't been cashed yet, so the picture will certainly change by month-end.
If you want a more precise understanding of the data, mouse over a section of the pie chart to see the number of transactions and your overall spending in the category (including % of total spending).
Compare these results to your budgeted percentage and you're on the Middle Way.
For those wanting even more precision — mainly the ability to track to specific dollar budgets each month for each category — you can use Mint's Budgets functionality. While I won't review this functionality in detail, as the Trends view largely provides me with the level of detail I require, some may be interested in this view.
Based on the percentages you're targeting (converted to dollars), create budgets for each of the Balanced Money Formula subcategories. Mint will now track your spending (through categorized transactions) to your budgets throughout the month, providing another visual reminder of how well you're keeping to plan.
A Final Meditation
While rich data and glossy charts from Mint are interesting to look at, and can indeed provide helpful insights and motivation, it's important to remember that they're only part of the solution. This approach is only useful if it helps guide you toward making improved spending and saving decisions which are more fully aligned with your goals and objectives.
With that, and with these tools and approach at your disposal, I hope you too are now on your way to finding budgeting nirvana by walking the Middle Way with GRS, the Balanced Money Formula, and Mint.