10 Ways to Simplify Your Budget

Every Tuesday is Finance & Family Day at Zen Habits.

I’m always looking for ways to simplify my finances (I’m weird like that, I know), and recently I’ve been scrutinizing my already-simple budget to make it even simpler. I thought it would be helpful to share some of the ways to make your budget as simple as possible.

The goal is to reduce headaches, eliminate the need for complicated tracking schemes, and reduce the time you spend on your budget and finances to about 15-20 minutes per week. I can’t claim these ideas are original, or that I haven’t discussed them in various places before, but in my experience, they work. They’re simple and powerful.

Let’s first look at setting up a budget. If you haven’t done it yet, it’s probably because budgets seem intimidating to you, or they are too much hassle to set up and maintain. Those are both valid points — which is why you should follow this simplified plan if these things apply to you. Now, there’s plenty of fancy software out there for setting up budgets, but I don’t think they’re necessary. A simple spreadsheet will do — and if you can create a SUM formula to add up the total of a column of numbers, you have all the spreadsheet knowledge necessary.

Create a simple spreadsheet for your budget, if you haven’t already, and start by listing your income and your monthly expenses. Estimate, in round numbers, how much you spend on each expense every month. You can adjust later, but it’s better to err on the side of too high a number, rather than putting a low number and breaking your budget.

Now let’s look at ways to create a simple budget:

60 Percent Solution. There are many ways to structure your budget, but the simplest I’ve found is the 60% solution. Basically, this budget asks you to fit your regular monthly expenses within 60% of your gross income, so that you have room for savings (long-term and short-term), retirement and spending money (”fun money”). These are the things that most often break a budget, because most people don’t budget for them. Now, your percentage will vary, but the percentages given here are just rough guidelines:
- 60 percent: Monthly expenses — such as housing, food, utilities, insurance, Internet, transportation. This is the part most commonly thought of as a budget.
- 10 percent: Retirement — and if you’re doing it right, this is being automatically deducted from your paycheck for a 401(k) investment.
- 10 percent: Long-term savings or debt reduction. It’s best to invest this in something such as stocks or an index fund, and this can serve as your emergency fund. But if you are in debt (not including a home mortgage), I would advise that you use this portion of the budget to pay off your debts, and even draw some from the other categories such as retirement to increase this to about 20 percent for now. Once your debts are paid off, you can switch this to long-term savings. You still need to have an emergency fund, but while you’re in debt-reduction mode you can either create a small, temporary emergency fund out of the money from this category or the next.
- 10 percent: Short-term savings — this is for periodic expenses, such as auto maintenance or repairs, medical expenses (not including insurance premiums), appliances, home maintenance, birthday and Christmas gifts. For this savings account, be sure to spend the money when you need it — that’s what it’s for. When these expenses come up, you will have the money for them, instead of trying to pull them from other budget categories.
- 10 percent: Fun money — you can spend this on eating out, movies, comic books — whatever you want. Guilt free.
Fewer categories. A lot of budget software asks you to fill in a million categories and subcategories. Those can be useful if you want to track all that stuff, but I don’t. I recommend simplifying: just use broad categories like food and gas and spending and utilities. Use what works.
Pay bills online. As much as possible, pay your bills online. These would be most of the bills in the first category above — utilities, rent or mortgage, cell phone, Internet, etc. If you can’t pay electronically, have your bank send out a check to the vendor. Make these payments automatic, so you don’t need to worry about them.
Automatic savings. Make your savings automatic as well. Every time your paycheck is deducted, have a scheduled transaction transfer a set amount from checking to savings. Use a high-yield online savings account such as Emigrant Direct, HBSD, or ING Direct.
Cash. For everything else, use cash. If you’re doing automatic bill payments and savings deductions, the only things you’ll likely need cash for are gas, groceries and fun money. Withdraw these amounts in cash twice a month, rather than using checks or credit cards. The reason is that it’s simpler — with cash, you don’t need to worry about overspending, or tracking how much is left in that category. You can see how much is left. Leave the credit cards for when you absolutely need them — traveling, for example.
Envelopes. If you use cash for three categories, for example, use three envelopes. This is an old-fashioned system, but I use it because it works. I have an envelope for groceries, gas and fun money. If I’m going grocery shopping, I bring the groceries envelope. I know how much is left in the envelope before I go grocery shopping. I spend the cash for groceries, and then can easily see how much is left now. Simple, and no tracking necessary. When the money is gone, you’ve spent your budgeted amount. If necessary, you could transfer cash from one envelope to another, and there’s no need to adjust your budget.
15-20 minutes a week. Now, the budget and spending plan I’ve outlined above is fairly simple and headache-free — but you shouldn’t assume that it doesn’t need any maintenance. You should devote 15-20 minutes a week to ensuring that your finances are in order. Just this little amount of time each week will greatly simplify your financial life, reduce headaches, and prevent any messes from occurring later. Set a day and time when you take a look at your finances each week. Set aside 30 minutes, just to be safe. Now take 5-10 minutes to enter your transactions into your financial software (I use MS Money, because it came with my computer, but a spreadsheet or other financial software will do fine). If you’re following the plan above, all you’ll need to do is go online, look at your bank account, and enter your deposits, bills paid, ATM withdrawals (only do this twice a month!), and any other fees. It shouldn’t take long. Now spend another 5-10 minutes to review your budget and make sure that all bills have been paid that should be paid. If not, pay them. It’s that simple. You’re done. Now go back to reading your blogs.
Fewer accounts. Some people have complicated systems set up with lots of different accounts. I say simplify. You don’t want to be checking a million different accounts. You should have one checking account and one or two savings accounts (one for emergency fund and one for periodic expenses). You could have a bunch of investment accounts if you want, but I’ve found it simpler to just have one. I lose diversity, but my fund is already pretty diversified.
Dump credit cards. Multiple credit cards are also a headache. Simplify by just having one. Or do what I do — have none. This will draw the usual outraged or preachy reaction from those who really love their credit cards, but I don’t care. I don’t like credit cards. Call me old fashioned. They charge high interest and they’re potentially dangerous (if you run up a high bill and an expense comes up that you need to pay for which means you can’t pay your credit card bill on time, you now are stuck with high-interest credit card debt). Use a debit card if you need to.
Pay all bills at the same time. It often just takes a simple call to get a vendor or creditor to change the due date on your bills. If you can get all your bills to be due on, let’s say, the 10th of the month, you can do all your bill paying at once. For some people, this will mean they will need to do a bit of scrimping to get ahead enough so that they can afford to make all their month’s payments at the beginning of the month, but it’s worth it. You can pay all your bills and be done with it.

See also:

If you liked this article, please bookmark it in del.icio.us. Thanks!

10 Ways to Simplify Your Budget

Every Tuesday is Finance & Family Day at Zen Habits.

Now let’s look at ways to create a simple budget:

60 Percent Solution. There are many ways to structure your budget, but the simplest I’ve found is the 60% solution. Basically, this budget asks you to fit your regular monthly expenses within 60% of your gross income, so that you have room for savings (long-term and short-term), retirement and spending money (”fun money”). These are the things that most often break a budget, because most people don’t budget for them. Now, your percentage will vary, but the percentages given here are just rough guidelines:
- 60 percent: Monthly expenses — such as housing, food, utilities, insurance, Internet, transportation. This is the part most commonly thought of as a budget.
- 10 percent: Retirement — and if you’re doing it right, this is being automatically deducted from your paycheck for a 401(k) investment.
- 10 percent: Long-term savings or debt reduction. It’s best to invest this in something such as stocks or an index fund, and this can serve as your emergency fund. But if you are in debt (not including a home mortgage), I would advise that you use this portion of the budget to pay off your debts, and even draw some from the other categories such as retirement to increase this to about 20 percent for now. Once your debts are paid off, you can switch this to long-term savings. You still need to have an emergency fund, but while you’re in debt-reduction mode you can either create a small, temporary emergency fund out of the money from this category or the next.
- 10 percent: Short-term savings — this is for periodic expenses, such as auto maintenance or repairs, medical expenses (not including insurance premiums), appliances, home maintenance, birthday and Christmas gifts. For this savings account, be sure to spend the money when you need it — that’s what it’s for. When these expenses come up, you will have the money for them, instead of trying to pull them from other budget categories.
- 10 percent: Fun money — you can spend this on eating out, movies, comic books — whatever you want. Guilt free.
Fewer categories. A lot of budget software asks you to fill in a million categories and subcategories. Those can be useful if you want to track all that stuff, but I don’t. I recommend simplifying: just use broad categories like food and gas and spending and utilities. Use what works.
Pay bills online. As much as possible, pay your bills online. These would be most of the bills in the first category above — utilities, rent or mortgage, cell phone, Internet, etc. If you can’t pay electronically, have your bank send out a check to the vendor. Make these payments automatic, so you don’t need to worry about them.
Automatic savings. Make your savings automatic as well. Every time your paycheck is deducted, have a scheduled transaction transfer a set amount from checking to savings. Use a high-yield online savings account such as Emigrant Direct, HBSD, or ING Direct.
Cash. For everything else, use cash. If you’re doing automatic bill payments and savings deductions, the only things you’ll likely need cash for are gas, groceries and fun money. Withdraw these amounts in cash twice a month, rather than using checks or credit cards. The reason is that it’s simpler — with cash, you don’t need to worry about overspending, or tracking how much is left in that category. You can see how much is left. Leave the credit cards for when you absolutely need them — traveling, for example.
Envelopes. If you use cash for three categories, for example, use three envelopes. This is an old-fashioned system, but I use it because it works. I have an envelope for groceries, gas and fun money. If I’m going grocery shopping, I bring the groceries envelope. I know how much is left in the envelope before I go grocery shopping. I spend the cash for groceries, and then can easily see how much is left now. Simple, and no tracking necessary. When the money is gone, you’ve spent your budgeted amount. If necessary, you could transfer cash from one envelope to another, and there’s no need to adjust your budget.
15-20 minutes a week. Now, the budget and spending plan I’ve outlined above is fairly simple and headache-free — but you shouldn’t assume that it doesn’t need any maintenance. You should devote 15-20 minutes a week to ensuring that your finances are in order. Just this little amount of time each week will greatly simplify your financial life, reduce headaches, and prevent any messes from occurring later. Set a day and time when you take a look at your finances each week. Set aside 30 minutes, just to be safe. Now take 5-10 minutes to enter your transactions into your financial software (I use MS Money, because it came with my computer, but a spreadsheet or other financial software will do fine). If you’re following the plan above, all you’ll need to do is go online, look at your bank account, and enter your deposits, bills paid, ATM withdrawals (only do this twice a month!), and any other fees. It shouldn’t take long. Now spend another 5-10 minutes to review your budget and make sure that all bills have been paid that should be paid. If not, pay them. It’s that simple. You’re done. Now go back to reading your blogs.
Fewer accounts. Some people have complicated systems set up with lots of different accounts. I say simplify. You don’t want to be checking a million different accounts. You should have one checking account and one or two savings accounts (one for emergency fund and one for periodic expenses). You could have a bunch of investment accounts if you want, but I’ve found it simpler to just have one. I lose diversity, but my fund is already pretty diversified.
Dump credit cards. Multiple credit cards are also a headache. Simplify by just having one. Or do what I do — have none. This will draw the usual outraged or preachy reaction from those who really love their credit cards, but I don’t care. I don’t like credit cards. Call me old fashioned. They charge high interest and they’re potentially dangerous (if you run up a high bill and an expense comes up that you need to pay for which means you can’t pay your credit card bill on time, you now are stuck with high-interest credit card debt). Use a debit card if you need to.
Pay all bills at the same time. It often just takes a simple call to get a vendor or creditor to change the due date on your bills. If you can get all your bills to be due on, let’s say, the 10th of the month, you can do all your bill paying at once. For some people, this will mean they will need to do a bit of scrimping to get ahead enough so that they can afford to make all their month’s payments at the beginning of the month, but it’s worth it. You can pay all your bills and be done with it.

See also:

If you liked this article, please bookmark it in del.icio.us. Thanks!

Posted on 30 May 2007 in Finance & Family |
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Comments (34)

Tan Says:

May 30th, 2007, 5:43 am

Leo,
I think its nice to proper credit to the person who came out this solution. This concept was written by Richard Jenkins published at MSN Money

Andy Says:

May 30th, 2007, 6:26 am

@Tan: Well, bits of it can be found all over the place. I’m not sure it’s really directly attributable. It’s just common sense and good advice.

Good to see it posted here, though: especially the cash-and-envelopes thing, which I came up with independantly, and thought I was probably being a bit daft. Nice to see I’m not the only one doing it. Thanks, Leo.

UnseenLlama Says:

May 30th, 2007, 6:32 am

@Tan,

Leo links directly to the MSN site!

Leo Says:

May 30th, 2007, 7:54 am

@Tan: As noted, I did link to the original article, and I hope that’s enough attribution. However, to be clear, only the first item on this list is attributable to that MSN Money article. The others are from myself or tips I found elsewhere that have helped me. I should also note, as Andy did, that the 60% solution is just one variation on a very common and very old budgeting method. The breakdown of the percentages may vary, but the basic sound method is the same.

Tina P Says:

May 30th, 2007, 8:13 am

If you’re using online bill pay, check to see if they have the option to schedule payments. Then, there’s no need to pay all of your bills at the same time.

For instance, my credit union will allow me to schedule a bill for a certain date every month for an indefinite number of payments, and then it sends it out for me automatically. Out of 15 or so bills per month, all but two are handled automatically with no intervention from me.

Betsey Says:

May 30th, 2007, 9:08 am

Hey Leo,

What’s your opinion about paying off student loans? Pay the minimum, because of the tax breaks (like a mortgage)? Or just get it over with?

Thx,
BB

Anthony Mills Says:

May 30th, 2007, 9:09 am

Without a credit card, how do you order from online sites? Sometimes it’s just, well, useful. And you can always go transfer money over immediately if you want to make sure you’re not late.

Brett McKay Says:

May 30th, 2007, 10:33 am

Great post, Leo. I totally agree with number 2. The one thing I can stand about computer budgeting systems is how many categories they have. It makes budgeting a complete chore.

I’m starting to move from MS Money, to a spreadsheet. While Money has the benefit of tracking your transactions, it often takes days for the transaction to show up. So, while MS Money says you have money in the account, you probably don’t. This has cost me some pricey withdrawal fees from my bank. Better to keep a register with you and mark when you’ve spent money.

Prateek Says:

May 30th, 2007, 10:47 am

How do you reduce the number of categories in MS Money? I started out with way too many and now I can’t remove them.

Happy Rock Says:

May 30th, 2007, 10:52 am

In a marriage communication is a key to having a budget that works.

@Anthony - Debit Cards work on the internet and offer the same ‘protections’ as credit cards, but using it means using cash not credit.

Peter Says:

May 30th, 2007, 12:09 pm

In re: credit/debit cards. If you use a card as a debit card, the money is immediately drawn from your account. If you use it as a credit card, the money is STILL immediately drawn from your account. But there is a difference. If you use it as CREDIT, the credit company whose logo is imprinted on your card will be your advocate if you have issues with your purchase. If you use it as DEBIT, that credit card company WILL NOT assist you with any issues that you have with the purchase

Robin Says:

May 30th, 2007, 13:02 pm

Hi Leo, long time reader, 1st time commenter. I (respectfully) disagree about credit cards…as long as you are responsible enough to pay them off before the interest accrues.

The reason? With many cards you get 1% cash back with no annual fee. It is not a lot, but it is something. Most vendors include transaction fees (about 2%) in the price, you are paying them already so may as well get something back.

John S Says:

May 30th, 2007, 13:53 pm

I like this approach: it’s simple and easy to remember, plus I’m already doing most of it! But I wholehartedly disagree about the recommendation of no credit cards.
Regular use of credit cards is important to building a good credit rating, and the trick is to self-monitor charges as if you’re using cash. I pay my charge bills in full every month, and it allows me to easily see where I’m spending money. Cash can too easily disappear. Also, as Robin pointed out, I also get incentives for using my cards. Cash back, miles, extended warranties on puchases, etc.
I live in the SF Bay Area, and like most people I know I am a renter. When and if I move to buy a home, my credit history is going to be a major factor, and with only car loans, the addition of responsible credit card use significantly impacts my credit score.

mukesh Says:

May 30th, 2007, 14:39 pm

You must mean 60% of your _net_ income, not gross. Otherwise, you ‘re over-budget (100% of your gross income allocated to as above doesn’t account for taxes).

Leo Says:

May 30th, 2007, 16:14 pm

OK, some great comments here, and some points to address:

1) On credit cards: I’m not getting into this argument again! :) It happens every time I mention credit cards. Let me just say that credit cards have caused huge amounts of personal debt and bankruptcies since they came out in the 1980s and I think they are one tool among many, but for many people, they are a dangerous tool. Using them is your choice — I just prefer not to. Now, you can disagree, but I won’t argue about this any more.

2) @mukesh: Actually, in the original article I linked to, taxes are included as a necessary expense. However, I am lazy, so yes, I do use net income. Either way works, but the percentages might change. Personally, I am now down to 55% of my net on necessary expenses.

3) Regarding student loans: I think most financial advisors would say that your money is best used by investing it rather than paying off the student loan more quickly. I agree, but personally, I would consider paying the loan off if you’ve already paid off your other debts. The reason: I like the freedom of being debt free, and once the loan is paid off, your living expenses have dropped considerably. That too means greater freedom. But it’s a personal choice — be sure to pay off your other debts first.

OK, let’s not argue about credit cards. :) Great comments, everyone!

AgentSully Says:

May 30th, 2007, 19:07 pm

I love using excel for keeping on budget. I can make my own categories and change things around easily. Like the envelope idea. You almost make me want to dump my credit card, but I probably won’t since my system is working for me and I never run into problems with overspending. When shopping, I can always hear in my head, my Irish dad saying, “do you really need that?” :-)

Paulo Eduardo Neves Says:

May 30th, 2007, 22:05 pm

I’m a happy user of Wesabe, a finance web application. They still have to get some things right, like the reporting features, but entering and categorizing your data is really painless. And it’s free!

hak Says:

May 31st, 2007, 2:05 am

One caveat on the debit vs. credit card protections. We also followed Dave Ramsey’s advice and move from a credit card to debit card…until I got hosed by the bank.

Here’s what happened.

We used the debit card to pay for dinner. Two days later, I went to the bank to deposit a $600 check with cash back of $100. I was told I was overdrawn and could not get the $100. I knew I had at least $400 in the account, so something was up.

Turns out someone from the restaurant went online shopping with our debit card and wiped out my bank account, and maxed out the ready reserve (line of credit/overdraft protection) to the tune of $1,500. In total, they blew through $1,900 in a shopping spree…mostly at Lillian Vernon which had a reputation for being very lax on credit card security.

It took six weeks to get my money back from the bank, even though they “suspected” fraud. I was first given a “conditional” return of my money after the first week, and then it was all straightened out by the sixth week.

Luckily, this was not our main account where the mortgage and other big bills are paid. Otherwise, we would have been bouncing checks left and right. Not good.

Now, if this had happened with a credit card, I would have disputed the bill and not had any out-of-pocket costs.

If someone goes crazy with your debit card…poof! Your money is gone until you can prove otherwise.

hak

MiGrant Says:

May 31st, 2007, 9:50 am

How about adjusting the percentages a little and added a “giving” category (say, half political and half charitable, or whatever works for you)?

Tantowi Says:

May 31st, 2007, 20:22 pm

We can save money with a budget on travel. If you travel often, think of where you travel. If you see that, you travel to areas locally, instead of driving start walking. You will get exercise; reduce your risks of heart attacks and save money with a budget too.

Seamus Says:

June 1st, 2007, 12:58 pm

Love the post and read the comments.

I too travel through life without Credit Cards. All online purchase and even phone transactions are no problem. The only time I’ve had a problem is renting cars. Almost all car rental companies will refuse to accept a debit card. I’ve only found one and they too have recently changed their practice (Alamo).

John has a good point about credit history and a house purchase - anyone know the long-term implications on credit score if you never have a CC? I’d rather not get a card just to boost my score for a house. I hope that other issues of responsible bill payments will still raise my overall score.

gerryc Says:

June 1st, 2007, 18:57 pm

i love my excel budget, pay all bills on line and use a debit card for incidentals to better keep track of everything. when i do use cash, i keep track of it in so i also know where that $ went.
i write down things in my budget that i want and see the list whenever i look at the budget. many times i realize that i no longer want what i wrote.
i’m finally getting the hang of this after years of credit card debt

Rebekah Says:

June 5th, 2007, 20:36 pm

Some interesting studies show that if you use cash, you will spend 15-20% less than you would using a credit card, especially at the grocery store. It just hurts more to use cash, so generally we spend less.

Mardee Says:

June 17th, 2007, 12:08 pm

One advantage to keeping your credit card debt is the fact that this is one of the few debts that completely disappears when you die. This, of course, doesn’t really affect the debtor but it certainly affects your family. If you’re a 20-something ex-student, it may not matter to you but if you are an older grad like me (I went to law school in my late 40’s), it may be worth hanging on to a 30-year student loan debt. If I live to be 80 years old, then great! - I don’t mind paying the whole chunk considering the alternative. :) But if something happens and I die when I’m in my 60’s or early 70’s, my daughter gets the slate wiped clean and could save thousands of dollars.

Mardee Says:

June 17th, 2007, 12:09 pm

Oops, sorry - that should have been “student loan debt” NOT “credit card debt.” Obviously, credit card debt continues after you die (unless you carry specific insurance).

Chris Says:

July 12th, 2007, 11:19 am

Leo,
Great post!

I won’t argue the credit card thing. But I will post something that I think can be valuable. Keep in mind that I’m just getting to your site, so I don’t know if this has been mentioned before.

If you don’t use a credit card wisely at establishments that allow you to, and don’t try to get them to lower the price, then you have already lost extra money (however small). The reason for this is simple. The establishment is spreading the fees for those that use the credit card amongst the sales of all of it’s products.
Personally, we get 3% back on all gas purchases, and 1% back on everything else that we put on the card. Now, we use it for gas (anyone that owns a car needs this … for the most part), groceries (who can’t live without food), dining out, and utility bills. Although we once used it for a down payment ($5,000) on a car, and the funds were already in our savings account so it was paid in full.

Our usage of the card provides a check in the amount of $50-$75 every other month that we can cash.

My terms of using a credit card wisely: Pay it in full when the bill arrives, and only spend whatever you had allocated in the first place.

Chris Says:

July 12th, 2007, 11:24 am

Seamus had an interesting question.

“John has a good point about credit history and a house purchase - anyone know the long-term implications on credit score if you never have a CC? I’d rather not get a card just to boost my score for a house. I hope that other issues of responsible bill payments will still raise my overall score.”

I believe you can go through life without a credit card. However, can you have a FICO score without it. I highly doubt it, since a FICO score is based on credit history. No credit, no history (at least I think it’s safe to presume that).

Rod Says:

February 2nd, 2008, 11:27 am

Hi Leo!

I hope it isn’t too late to comment and leave a question about this great post!

[...]You should have one checking account and one or two savings accounts[...] why not the checking account only, divided in checking, emergency and periodic expenses with the help of a spreadsheet? Eventually with just one investment account also

Your system is very similar with the one in the George S. Clason’s ” The Richest Man in Babylon”, did you read it? It is a bit simpler, but I think your’s could have the right balance; I’m trying it

Bye and thanks a lot for your blog! :D

Rod

Chris Says:

February 8th, 2008, 18:00 pm

I made a, perhaps overly so, simple Budget keeper. It’s is aimed at folks who have a single source of income and can’t fingue out where their money is going.

More for ‘in the moment’ budgeting than long term, but I hope it will help some people out.

It is a completely free site:
http://www.budgetbee.com

-Chris

cam balkon Says:

June 5th, 2008, 8:35 am

thankss

cam balkon Says:

June 5th, 2008, 8:36 am

You left off the cost for the clergy or judge officiating. It’s considered a “donation” but it’s still required.

(Our clergy asked how much I planned to pay him and wasn’t happy with the amount. He wouldn’t tell me how much he wanted. He asked how much we were paying the caterer, so I said $15/person and told him I didn’t think $30 was enough for his services.)

Rhys Says:

June 6th, 2008, 8:39 am

Some really good discussion on budgeting techniques and tips for controling your spending.

To help make budgeting easier, I created a site (http://www.easy-budgeting.com) which allows users to download a fully integrated Excel based budget planner.

If you’re struggling with creating a budget planner, this may help!

Cheers and good luck with your budgeting.