This is the third post in a series about how to build a better budget. You can check out the other posts here:
Now that you’ve got your budget categories created, what are you going to do with them? In this post we’ll talk about a few different styles or “methods” of tracking so that you can think through them and decide which method fits your lifestyle the best. And not just your lifestyle, but what you’re trying to accomplish with your budget.
I mean, doing absolutely nothing is pretty easy, right? Buuuut that doesn’t accomplish a whole lot. Here are the budget tracking methods I’m familiar with, each of which I’ve tried myself at some point.
Rear-looking Budget Tracking
With a rear-looking tracking method you analyze how your money was spent over the last period of time (usually a month) and then you make adjustments for how you plan to spend your money next month. In its most basic form, this might consist of keeping receipts for everything you buy, then taking them home and writing them down onto your budget sheet, as you have time. I call it rear-looking because you’re not doing much thinking about next month, nor are you changing your habits mid-month, in most cases. Generally this is a “set it and forget it” style of budgeting where you’ll set your monthly category amounts well in advance, with the hope that things will level off over the course of a year.
Another shortcoming of this method is that the money doesn’t roll into the next month (in a given category). Kind of like your cell phone minutes, if you only spend $5 in clothing this month, but then $140 next month, it looks like you’ve totally blown out your $75 budget amount. Again, the average should catch up if you’re patient with it, but it can wreak havoc with your bank account balance sometimes.
On the other hand, this method generally works well if you’re looking for the minimum amount of effort possible and you’re not too concerned with going over-budget in a few categories. Like, for those of you with a Restaurants category with $500/month it in. Yum. Sounds nice! I can tell you that this group does not include FI Pilgrim. But the point is if you can afford for your categories to run over sometimes then you don’t have to pay quite as much attention to your budget as the rest of the world.
But even doing this little bit of tracking will get you some valuable information about how you typically spend your money. And you can change your habits slowly over time.
Zero-Sum Budget Tracking
This method of budget tracking consists of setting a monthly “allowance” per category and when that category’s money is gone, then *boing!* No more money until the next tracking period. The most common way of setting up a zero-sum system is by using envelopes (commonly known as the “envelope method”).
The idea is that you would “fund” these categories (or envelopes) with a set amount of cash at the beginning of the tracking period, and when the money is gone, it’s gone. There’s no way to go “over budget” unless you begin taking money from other envelopes. Even if you do rob other categories, the money has still got to be there, in one of them, to use. The tangible nature of cash in envelopes (or account balances on a spreadsheet) makes this tracking method fairly simple, and easy to notice when you’re spending way too much in a given category.
And unlike the rear-looking method, the money left over at the end of the month rolls over to the next, making it a little easier to ensure that the money is there when needed.
Forward-Looking Budget Tracking
This type of budget tracking is kind of a hybrid, because it consists of a few elements of the first two, and then adds an element on top.
The biggest shortcoming of the first two budgeting methods (in my opinion) is on the planning side of things. While the first two methods usually have budget amounts set at a consistent level, a forward-looking budget dictates that you consider the expenses that will be required in the upcoming period (each period) and put the proper amount into your categories to start off. If all goes according to plan, you don’t have to “change plans” as over-spending occurs, you’ve already placed the proper funds into that category, so those expenses are expected. It’s a subtle difference, but it definitely changes how you think about your budget as time goes on.
But just like the envelope method, the money rolls over to the next month, in the same category. The difference is this: when you’re looking forward all the time (in order to set next month’s categories) it becomes much easier to make proper adjustments to your categories mid-month. You’ll know, for example, that “two months from now is that big event in the upstate that we’ve been looking forward to, so don’t touch the vacation category for now!”
Next post we’ll look at some of the software solutions that help with these various methods, and the ones I recommend. While tracking a budget isn’t rocket science, it can definitely take some time and attention to detail. Using computer software or online/phone apps can go a long way in making a budget work for you!
Let me know what you think in the comments! Do you like or dislike any of these methods?