In the article Money Myths for Young Graduates, one of the myths I wrote about was the misconception towards long, detailed budgets. However, I have found that micromanaging every little transaction literally sucks life out of my soul. As I mentioned, I use Wesabe to view my spending, instead of Quicken (as a software developer, I’d rather shoot my eyeballs out than look at Quicken more than a minute). Now, Wesabe is nice because you simply “tag” a transaction. That is, instead of putting a trip to McDonalds into a Food category, you could tag it as “food, fastfood, warning, fat”. At the end of the month, you can then view the Fat category to see how much you pay to gain weight. This really does a great job of eliminating the need to find a tiny category for every expense.
However, despite the agile way Wesabe allows you to view your expenditures, I really needed to find a way to control my spending. Strict categories are good for learning how to spend, because you can easily see “oh, I spent $39 on fast food, when I only budgeted $25”. However, when you create a category list, you can easily get to 30-40 categories without blinking. My solution was to knock it down to 4, one of them having 2 subcategories. Then, I use Wesabe to view exactly where extra money is going, or where I have done well. Admittedly, these categories may not be appropriate for older married people, because it ignores things you might need to track such as tax-deductable home expenses or such. However, I find it a great tool for those starting out. It keeps things simple, and makes the end-of-the-month sorting process so much quicker. For those of us who are not Type A, it keeps us on our game.
1. Static Expenses. I quickly noticed that if something was going to cost the same amount every month, then why did I need to track it separately? I know my rent is $875, I know my car payment is $250, I know my insurance payment is $100. Why should I track those individually? I found about 7-8 “categories” that fell under this description: required expenses that do not adjust from month to month. Put them all in the Static category.
2. Dynamic Expenses. These are the expenditures that can change from month to month. There are two types of dynamic expenses I saw, Required and Flexible. Required includes the expenses that may differ each month, but you are stuck paying them, such as electricity, gasoline, etc. Flexible includes the expenses that may differ each month, that you can exert some self control to decrease, such as food, entertainment, bank fees, etc. The reason these two go into the same “main category” is to contain in one category the fluid part of your budget, or the part of your budget that has the most activity. For example, if you micro-budget $100/month for gasoline and wind up spending $120, you must “borrow” that money from your Flexible budget. In this way, you can set a main budget for all Dynamic expenses, and if you have to get a second haircut in a month it’s ok; just use money from another sub-category, always prioritizing the Required category. Again, I’m single, so it’s very easy for me to borrow money from my food allowance, I simply eat cheap. This may not work for a family, in which case you can always make food into a Required or Static expense. The whole point is to not follow my format but create your own.
3. Savings. Obviously, this includes any money you put towards any type of savings account. Right now, I am collecting an emergency fund, and have a relatively high Savings budget. When I begin shifting money to debt repayment this may drop to nothing. However, I also use this to track money I use for my retirement account and any money I make in interest or dividends on previous investments.
4. Debt Repayment. This is the category that takes into account any debts you are actively engaged in paying off. You may keep your mortgage, student loans, or cars under the Static category, since they are stable monthly expenses. However, if you begin paying extra in hopes of being out of debt sooner, you may wish to shift it to this category. My endgame is to eliminate this category entirely.
As a software developer, I pay a lot of attention to design, even reading about architecture and typography. A common theme is that the key to any good design is workable simplicity; that is, the least amount of overhead that allows the same accomplishment. In software, this translates to the fewest clicks it takes to accomplish an action (even if I have to add super advanced logic into the code to “think for the user”). In architecture and photography, this may be the concept of empty space or geometric patterns to gain a desired effect.
In the same way, in order to have a well-designed budget, it should not be any bigger than necessary. You may find that you still need 30 categories to effectively manage your spending. However, some of you maybe fine with 2-3 categories. I have found that the 4 category system works well for my expenses. However, everyone is different.
My point here is that it’s your responsibility to design a budget, rather than using someone else’s. Take a deep look at what your are spending, and what your common pitfalls were. Design a way to manage things where you will minimize setbacks. Design a budget that allows you to quickly categorize things at the end of the month. If you crack open Quicken, the first thing I recommend is to delete every category and start from scratch. Otherwise, it will always be too complex and unworkable, and the result might be that you give up again. By designing your own budget, you eliminate the chances of failure, because you know yourself better than Quicken knows you. And, like me, if you still wish to track expenses in micro-categories (if you want to know how much you spend to gain weight), try out a tool like Wesabe to help you out. In addition to a small categorized budget, a more flexible tool may work wonders toward your personal financial goals!