The budget toolbox: 13 tools for building a better budget
Sara's been reading personal finance blogs for a while now, and she's ready to set up a budget. She's come to us for help. She writes:
I would like to start listing my spending totals into a spreadsheet budget along with setting goals for ‘bigger things' (trips, winter tires etc). Do you have a budget template that works for you, or could you please recommend a few tips on getting started?
A budget can be an excellent tool not only for planning your spending, but also for planning your saving. Over the past 2½ years, I've shared a variety of budgets and budgeting tools — here are some of my favorite.
3 Budget Frameworks
A budget doesn't have to be complicated. In fact, readers have recommended three very simple budgets to me in the past. Most people will need more detail than these provide, but each provides a framework on which to build something more personal. (Notice that each of these allocates 20% to savings. If you can pick that habit up early, you'll be way ahead of the game.)
In The Only Investment Guide You'll Ever Need, Andrew Tobias offers the following simple yet effective budget:
- Destroy all your credit cards.
- Invest 20% of all that you earn. Never touch it.
- Live on the remaining 80%, no matter what.
Although Tobias is being glib, this is actually an excellent system. If you can develop the discipline to follow just these three steps, you can become rich.
In All Your Worth: The Ultimate Lifetime Money Plan, the authors argue that in order to succeed financially, you must keep three broad areas of your finances “in balance”. They say to divide your net income (after-tax income) as follows:
- Allocate 50% to Needs (which the authors call Must-Haves). Needs include housing, transportation, groceries, insurance, and clothes you really need.
- Spend 30% on Wants. Wants include cable television, clothing beyond the basics, restaurant meals, concert tickets, comic books, knitting supplies, etc.
- Set aside 20% for Savings, including debt repayment.
This budget is designed so that you can save a lot and have fun. To achieve this, the authors encourage you to reduce your Needs. In fact, reducing Needs is the cornerstone of their advice.
At MSN Money, Richard Jenkins offers his 60% solution. He suggests your budget should divide monthly gross (pre-tax) income like this:
- 60% to Committed Expenses such as taxes, clothing, basic living expenses, insurance, charity (including tithe), and regular bills (including things like cable).
- 10% to Retirement.
- 10% to Irregular Expenses such as vacations, major repair bills, new appliances, etc.
- 10% to Long-Term Savings/Debt — money set aside for car purchases, home renovations, or to pay down substantial debt loads.
- 10% for Fun Money to be used for dining out, hobbies, indulgences, etc.
Jenkins believes that the best way to relieve money pressure is to reduce Committed Expenses: cut the cable TV, spend less on clothing, reduce your housing expense, etc.
4 Budget Spreadsheets
Once you've picked a framework on which to build, there are a host of budget spreadsheets to choose from. My top recommendation is the PearBudget spreadsheet, a detailed, polished work of Excel art. If this doesn't meet your needs, move on to another option.
One of those options is the free and simple budget planner that Jeff M. shared with Get Rich Slowly readers last February. It's available in two formats:
- Microsoft Excel (70kb) — right-click and choose “Save as…” to download. This file should also work with Open Office.
- Google Docs — select “File -> Copy spreadsheet…” to save to your account.
Jeff's spreadsheet is designed solely to keep you on a budget you've already set, not to help you create a budget. Budgets vary from person-to-person. Create one that works for you, and use this planner to track your progress. If you need help developing a budget, try this Google Docs budget estimator from GRS-reader Justin M.
Finally, GRS forum administrator Stephen Popick shared his homegrown budget workbook last year. This highly customizable spreadsheet has tabs for your budget and your spouse's budget.
(If you're looking for other financial tools, It's Your Money offers an additional 33 personal-finance spreadsheets for a variety of uses, from budgeting to fuel tracking to CD laddering.)
3 Web-Based Budget Tools
Naturally, there are web-based tools for budgeting, too. Here are three excellent choices:
- The afore-mentioned PearBudget comes in a web version that receives rave reviews.
- NeoBudget is an online budget manager that uses the envelope method to help you track your spending habits and stick to a budget.
- Finally, You Need a Budget offers a robust feature set, and is probably most appropriate for advanced budgeters.
I've never used any of these products. If you have tried one (or more), leave feedback to let us know your impressions.
A Few Words of Advice
Last March, Joshua explained why he believes budgeting is the most important thing you can do with your money, and offered hints on how to get started. More recently, Trent at The Simple Dollar shared his 10 tips for a successful budget:
- Know why you are budgeting. Don't do it just because you think you should — do it to help yourself spend less than you earn.
- Have a specific, concrete long-term goal in mind. Remember: the road to wealth is paved with goals.
- Know how much you actually make.
- Have accurate data for both your monthly spending and your irregular spending. You can get this data by learning to track your spending.
- Choose checking and savings accounts that include useful budgeting tools by default. ING Direct, for example, makes it easy to open multiple accounts.
- Use a simple budgeting tool that you're able to understand. “Start with pencil and paper if you have to,” Trent says. (Any of the tools I listed above would be a good choice.)
- Be realistic. Don't start by promising yourself to be a super saver. Take small steps, and work up from there.
- Get support from at least one other person.
- Set some short-term goals that will be easy to achieve if you stay on budget. These will give you a psychological boost so that you're more likely to stick to the program.
- Don't be afraid to adjust your budget (even radically). Be flexible. Your goal is to find a system that works for you.
Trent's advice is great. I'd add that, if possible, you should base your budget on yearly expenses. The Journal of Consumer Research found that people are more accurate when constructing an annual budget than a monthly budget.
Reader Hints and Tips
All of these tools are excellent resources to help Sara start budgeting. I think her best bet, however, is to pick the brains of Get Rich Slowly readers. You are real people with real lives who have implemented real budgets. You're not some personal finance writer pushing a theoretical model to sell books.
If you keep a budget (or have in the past), what's the best way to get started? What works? What doesn't? What should Sara do to ensure ongoing budgeting success?
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