A Simple Budget That Works?

Jan 17, 2013: We usually brown bag our lunches to save money and force ourselves to stick to a healthy diet. So far it has worked well. Not only that, it has inspired some of our colleagues to do the same. Over time our camaraderie has led to the formation of a small sized group (of us) who meet during lunch hour to discuss various issues of our lives. Of late, the current challenging economic scenario has guided our conversations towards various aspects of personal finance.

This week we were thinking of new ways to save money. In this light, someone questioned about the effectiveness of budgeting. One of our new colleagues (fresh from grad school), said that her experiences with budgeting had led her to believe that it was ineffective and time consuming.

As techies we work long hours which often involves a lot of stressful deadlines. In spite of that she had spent her weekends in tediously installing a budgeting software, wiring her bank and credit accounts at one place, pulling in various statements and diligently entering extra transactions manually. At the end of the month, she felt that budgeting and tracking expenses with a piece of professional software was extremely time consuming and involved lot of maintenance effort on her part.

To make matters worse, as a newbie she had felt overwhelmed with the entire software package that had tons of features that she did not need. On hindsight, she felt that a simple notebook, an Excel sheet along with her online bank and credit card accounts were sufficient to keep sight of where her money was going. She also added that as a grad student she had kept track of her money using a small memo book for recording daily expenses and an Excel sheet for her entire month's cash flow. It was an easy and quick method. Also, it gave a simple snapshot of her financial health with a single click. She smilingly added that she could not see the forest because of the trees!

At this point we felt that it was important for us to share our experiences. For success, it was necessary to differentiate between the concept of budgeting and the tools needed to implement it. Budgeting has always been a sound technique. It enables us to live within our means. But there are two key aspects that make it effective. One is simplicity. The other is its flexibility to adapt to our changing needs.

As we continued to talk, memories from our early days flashed by. When we were newbies to personal finance, we used to diligently make several categories for expenses, tag every expense to their respective categories, and make rigid goals. Often we'd be proud of our great system complete with its pie charts and bar graphs. But the sad part is that our budget would fall apart whenever surprise events cropped up in our lives. Also, like our new colleague's experience, we found that it was time consuming. Soon we realized the caveat. The system was too complex and rigid. Real life was different. It demanded flexibility and simplicity.

We shared that the first prerequisite for budgeting to be successful was a simple concept. In this light, we found Richard Jenkins's suggestions for a simple budget very useful. We had tweaked his model to suit our tastes and cater to our needs. Next, we drew a pie chart on a napkin showing our 50 Percent Model:

• 50 Percent for Must Expenses: All our committed expenses go in here. For example, rent, utilities, commute, food, insurances, phone and internet, and taxes. In short, all that is needed to survive.
  

• 15 Percent for Long Term Savings: Pay yourself first comes in here. We use this money to build our emergency fund and investments' portfolio. It keeps us prepared for that unexpected rainy day.
  

• 15 Percent for Retirement Savings: This part of our savings is automated through monthly deductions from our salary for our 401(k) and IRA contributions. It takes care of our need to maximize the advantages of savings in tax deferred accounts.
  

• 15 Percent for Charity: Since we are philanthropists at heart, we put away this chunk as our support to various worldwide charities. Giving back makes us feel good :).
  

• 5 Percent for Fun and Travel: This is for fun without feeling bad about spending money on ourselves. You can call it planned splurging!
  

Many of our colleagues voiced a concern about debt. Since we are debt free, our model did not have any category for paying off debts. We all know that the first step towards effective savings is to pay off our debts. An elderly colleague suggested that one could reduce the percentages in the categories of long term savings and charity to pay off debts first. Once the debts were paid off, these categories could be revamped according to prevalent needs. Now, that was a neat idea!

We also voiced that this model enabled us to have fewer categories. Since the goals were in terms of flexible percentages, it gave our budget more room to adapt to the constant flow of changes in our lives. In addition, automatic payments (online) and batch tasks had reduced our budget's maintenance time to at most one hour per week. This freed up time to do stuff we really enjoyed during the weekends.

Our elderly colleague said he used an envelope system of budgeting and it worked fine for him. He was a little skeptical about putting his personal information on the web or in a software that used the web. Security was a big issue for him. However our younger colleagues had trust over web based money management systems like Mint, Wesabe, and Geezeo. Some of them also used professional software for money management like MS Money or Quicken. We personally use MS Money since its easier to manage our portfolio, cash flow and taxes in one place.

Suddenly the fire alarm went off and we all rushed out. It was chilly. We were lucky since it turned out to be a false alarm. Within ten minutes we were back in our seats to enjoy the last fifteen minutes of our lunch break over steaming cups of coffee.

Our conversation returned to tools needed to implement budgets. At this point the frugal superstar of our group suggested a FREE web based tool named BudgetTracker. He uses it for budgeting, keeping track of his cash flow, and organizing his shopping. Since he was a frugal stud, he did not want to pay his hard earned money to Microsoft or Intuit. He'd rather have it working for him. This was something new and we were all ears.

Addressing our elderly colleague's concern about security, he added that one could enter their account balances and transactions into the software to track the cash flow. There was no need to link bank accounts directly.

To get started all we needed to do was create a BudgetTracker account. The free account would have ads but he did not mind them since they made the service FREE. He was allowed to enter data for ten bank accounts, set up 50 calendar reminders and 15 bill payment entries. However it is to be noted that BudgetTracker does not facilitate online bill payment at this time. At present we could enter information (like links to payment pages) regarding our bill pays with due dates. Next, we could set up automatic bill pay reminders and pay bills manually via handy links to the provider's bill pay pages. If we need an ad free account with unlimited entries, BudgetTracker has subscription based accounts for $2.95 per month.

In addition, the ability to add notes and tasks helped our friend to keep his weekly grocery and car maintenance lists in his Budget Tracker calendar. This web based software also provided the ability to do proper book keeping through transactions. He said that he was mighty pleased with the system's ability to import transactions from .CSV and .QIF files. It did away with the drudgery of entering transactions manually. He could also split transactions and move his money across different bank accounts to keep his transactions in allocated categories. In short, it helped him balance his budget.

Since we use Google calendar, the proposition of maintaining two calendars appeared intimidating. So we asked whether we could export a BudgetTracker's calendar into Google's. Our friend smiled and said he does that with a single click.He uses Google's calendar too since it's more powerful. Good! That meant one less task and a single view of all mandatory payments.

Well by now our coffee mugs were empty and it was time to get back to work. It was definitely an interesting discussion. We came away richer with the knowledge about BudgetTracker. Our new colleague found our simple model of budgeting more appealing and is going to give it a try. However we are not sure whether our elderly colleague is going to experiment with new things. We'd love to see him try though!

Go ahead and let us know about how you budget your money and what tools you use for it. All of us always learn so much through shared feedback :).

Image Source(s): iStockPhoto

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