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How to Not Set a Budget

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Most people cringe when they hear the word ‘budget’. It sounds tedious and restricting. Who wants to live by a bunch of rules that dictate how much they can spend on food, clothing or entertainment each month? That’s why I don't generally recommend family members or clients to follow a strict monthly budget. It may work for some, but most people I’ve talked to find it too rigid or tiring to implement.

Instead, what I recommend is tracking monthly cash flow, which is something I have been doing since I graduated from college. Now that it’s the beginning of a new year, it’s a great time to start if you’ve never tried it before. There are three benefits to tracking your income and expenses:  1) it gives you a better understanding of your overall financial picture (ex. how much are you saving), 2) it helps you set goals for the future and achieve them (ex. can you pay off your loans faster), and 3) it shows you where you can make changes in the future if necessary (ex. where can you cut back to pay for your children’s tuition). I’ve worked with several clients who tracked their expenses for the first time and told me that the exercise was eye-opening because they had no idea how much they were spending in certain areas.

So how does one get started? If you use credit cards for most of your purchases, you can look into setting up a free account at www.mint.com which automatically pulls all of your financial transactions and categorizes them for you each month. I personally love using Excel because I like having my own expense categories and I can format the spreadsheet exactly the way I want. If you go the Excel route, I recommend keeping a receipt for every purchase so you can record them at the end of the day or end of the week. You can also upload the Excel document to Google Drive so you can share it with your spouse and access it anywhere with internet.

If you decide to start tracking your cash flow in 2013, here are a few tips that will hopefully make the process as painless as possible.

  • Consider the first few months as a fact gathering exercise - just track what you’re spending by category and don’t feel pressured to change your spending habits.
  • After 3 or 4 months, compare the monthly results and make observations. If you’re married, it’s a good idea to sit down and go over it together with your spouse.
  • If you notice high spending patterns in a few categories, you may want to monitor it more closely over the next few months. You don’t necessarily have to set a ‘cap’ on how much you can spend in those categories each month, just the fact that you are aware of your spending should help you keep it in check.
  • Allow for some flexibility – if you are making a large one-time purchase in a particular category, try to cut back in another category that month or reduce your spending the following month to make up for it.  
  • Set a savings goal that you want to reach by the end of the year, but gradually build up to it so it doesn't feel so overwhelming that you give up before even trying. For example, if you are currently saving $100 per month, try to increase that by $25 each consecutive month. By December, you should be saving on average $400 per month!
  • Make it fun and reward yourself – Set aside a percentage of your savings goal for your vacation fund, a shopping trip or a new TV!

So don't delay - get started this year on a good financial habit that will pay off dividends in the years to come!