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The Easiest Way to Organize Your Budget

Written by Sam on February 3, 2007 – 9:06 pm -

personal budgetIt can take a lot of up-front work to establish a working budget. The good news is, once your budget is established it really doesn’t take a ton of work to maintain. You can make budgeting even easier by organizing it the right way. This article will review a few different ways to organize your budget. Then I will explain the easiest way I’ve found to organize our budget.

Fixed/Variable Model

In my post about how to create a personal budget I addressed how to create your first budget. In that article I advocated using the fixed/variable model; first allocate your fixed and semi-fixed expenses, and next allocate your variable expenses. For first-time budgeters, this makes a lot of sense and helps you first determine your hard landscape (fixed expenses) before you fill in the rest (variable expenses). This is still one of the best ways to create your first few budgets, but isn’t the most efficient way to group categories once your budget is established.

Necessity Model

The next model is the necessity model. Using this model you budget your necessities first (food, housing, clothing) and proceed from most essential to least essential. This ensures you can pay for shelter, food and clothing before you pay for your new HDTV. This can also be a useful model for novice budgeters. But it is particularly relevant if you’re in an emergency financial situation or if you’re facing bankruptcy. Give priority to the necessities and let the other expenses take a back seat. However, this model is not very useful for normal month-to-month budgeting.

Usage Situation Model

There are really only a few ways to “use” or manage money. By grouping budget categories by how the money is used you can accelerate the budgeting process.

I’ve found it most helpful to group the categories as follows:

  • Automated categories – Expenses paid automatically (electronically)
  • Cash (Debit) categories – Expenses that will be paid for in cash or with a debit card
  • Accumulated categories – Periodic or irregular expenses that need to be saved for (these may be automated or paid for using cash or a debit card)

Grouping categories by usage situation also makes it easier to manage and keep track of your money. For example, by grouping automated categories, it’s easier to identify how much money you need in your bank account to cover those expenses and the timing of those withdraws. If you want to review your automated expenses to ensure they’re behaving as expected, you have them all at your fingertips. By grouping cash categories you can quickly calculate how much money to withdraw every month for cash expenses. By grouping accumulated categories, it’s easier to track and manage the balance of each category and where those funds reside.

Let’s look at each group individually and how to address them in your budget.

Automated Categories

When reviewing your budget, first address the automated categories. This group is pretty self-explanatory. These are all the categories that are paid automatically on a monthly basis. They are typically fixed (with a few exceptions) and the amount rarely changes. The great news is, this is the category that should take almost no time to address. You just copy the amounts from one month to the next and you’re done. You typically won’t need to have big discussions with your spouse about these categories unless the rest of your budget is very tight.

Here are some examples of Automated categories:

  • Utilities
  • Mortgage
  • Some charitable donations
  • Retirement or other long-term savings
  • Subscription Services (satellite)
  • Some insurance expenses
  • Some medical expenses

Automated categories tend to be difficult to change without a lot of effort. For example, your mortgage payment cannot be easily or quickly changed. If you decide to switch satellite or cable providers, it’s typically a multi-week process. That’s not to say these expenses can’t change, but often it takes more time and effort to do so than other expenses.

Dealing with variable automated expenses

Some automatic expenses are variable such as utilities (gas, electric). In these cases, find out if there’s a fixed payment option. Many utility companies offer a fixed payment option that calculates a fixed average payment for 6 months or a year. If you end up paying too much, the fixed payment is adjusted down at the end of the period. Pay to little and it’s adjusted up. These programs can provide a lot of stability and predictability to a budget and should be used if possible.

If a fixed payment program is not available, you’re still ok. Simply look at how much you pay on average for that expense and budget a high average for that category. For example, our telephone provider doesn’t provide a fixed payment program so we looked at our bills and found that, on average, the bill is $80 (including internet service). It tends to regularly fluctuate up to $85 and down to $75, and very rarely goes up above $90 (my wife didn’t realize calling Canada was so expensive). We decided to budget on the high end of the typical range at $85.

By budgeting on the high side, you give your budget more stability and provide a little cushion. If we go over $80 a little, we’re covered. If we go under, we let the extra funds accumulate to cover months that go over. Don’t worry too much about the exact budget amount. Over time, it will become apparent if you’re budgeting too much or too little. If you budget too much, feel free to re-all ocate the overage and treat yourself to dinner. That will act as a cue that you can reduce the monthly allocation. On the other hand, if you find you’re always short on that category, that’s a cue to increase the allocation. I should also mention that I’m assuming you already have an emergency fund establish so that if you happen to unexpectedly go over a large amount, you’ll have the money to cover it. You can check out my article about ways to save a little cash for an emergency.

Cash (Debit) Categories

Next, address your cash (or debit) categories. These expenses are usually depleted every month; you budget $100, you spend $100. Uncontrolled, cash categories tend to be highly volatile. This is where much of your overspending can occur which is why it’s good to use cash. Fortunately, as your budget matures this group is fairly easy to address because your needs won’t change much from month to month. When you first start budgeting as a couple, there is typically a lot of discussion about how much to allocate to categories like “grocery,” but over a few months, you should settle into a sweet spot. After that, you typically won’t make major adjustments unless there’s a significant change in your financial situation.

Example cash (debit) categories are:

  • Grocery (food or non-food)
  • Eating out
  • Clothing
  • Some Medical
    • Prescriptions
    • Over-the-counter medications
  • Babysitting
  • Personal Money
  • Entertainment

A good rule to follow is that any category where you tend to overspend should be cash. One benefit of grouping your cash categories is that it’s easier to calculate how much cash you need to withdraw every month because they’re all in the same place.

Accumulated Categories

Finally, look at your “accumulated” categories. “Accumulated” budget categories are expenses that may occur less frequently than monthly or that may be unpredictable. In other words, these are categories where you “accumulate” funds over time until they are needed. Accumulated categories are the least homogeneous of the three groups. Some are semi-fixed like Insurance and car registration payments. Others can be wildly variable like vacations and gifts. Some accumulated categories are easy to change while others may be difficult. For example, changing your clothing budget is not difficult to do (even though your wife might have issues with it). On the other hand, quarterly or yearly life insurance payments may take considerable effort to change, particularly if you need to research insurance companies, get a new quote, get a blood test, etc.

Unfortunately this is where a lot of the arguing, negotiating, compromising, and pleading takes place. In a more established, mature budget, this group won’t take long. But if your just starting out, or if you’ve had some changes in your financial situation, expected or unexpected, you’ll want to plan on spending some time here.

Here are some examples of Accumulated categories:

  • Insurance
  • Car maintenance/registration
  • Savings for large purchases
  • Household maintenance
  • Medical
  • Gifts
  • Travel
  • Subscriptions
  • Memberships
  • Car replacement (we still aren’t funding this one)
  • Clothing (if not taken out in cash)

There are 2 ways to deal with accumulated expenses

  1. Make equal payments
  2. If your $100 car registration is due in 6 months, allocate $17 a month to this category (100 divided by 6). By the time the registration is due, you’ll have the money. If you use this method, be careful not to simply divide all yearly expenses by 12 months unless you really have 12 months before the payment is due. When we first started budgeting, our next life insurance payment was only 4 months away so we had to allocate more money up front so we’d have enough. Once we made the payment, however, we then had 12 full months until the next payment and reduced the monthly allocation accordingly.

    You can track how much money has accumulated in a number of ways ranging from a sheet of paper to a spreadsheet to financial management software. In future posts I will address different ways of tracking these categories. In the mean time I would recommend either a basic sheet of paper, or keep track of the accumulated amount right in your budget spreadsheet next to the category name. If funds from different categories reside in more than one bank account, also note next to the category name what bank account the funds reside in.

  3. Use windfall money to fill in the gaps
  4. Most people don’t have enough money to fund all their accumulated categories in full every month because this is where many of the “wish list” categories reside. If you can’t fund every category you can rely on (or hope for) financial windfalls to fill in the gaps. When we first started budgeting, we were so tight that we simply didn’t have enough to allocate every month for gifts and vacations. But because the rest of our budget was under control, when we received a bonus or financial gift we could allocate it to these categories accordingly. As we’ve refined our budget and as our income has increased, we’ve been able to fully fund many of these categories on a monthly basis.

Speeding up the budgeting process — An example

Using these groups, here’s how our budgeting meeting usually goes.

  1. We look at automated categories. No surprises there. All the expenses are the same as always. Gas and electric are on an equal-payment system. The phone bill is $5 more than usual but we’ve been under a few months and have a little extra allocated to cover it. Time spent – 1 minute.
  2. We look at cash categories. Over time we’ve settled into a comfortable amount for each of these. For categories like “personal money” we’ve had many heated discussions in the past about how much should be allocated, but now that we’ve reached an agreement that we both feel comfortable with it doesn’t change from month to month. Emily calculates how much total cash she needs to withdraw this month. Time spent – 3 minutes.
  3. We look at accumulated categories. We’re on track to have our next life insurance and car registration payments saved by the time they’re due. We haven’t had any major medical expenses so we’ve built up a nice little balance in that category. We discuss if we need to reduce the amount we’re allocating every month to medical but decide that we’d rather have the funds ready just in case of a medical emergency. Time spent – 5 minutes.
  4. If there is any money not yet allocated, we first look to see if there are any known expenses coming up that aren’t on track to be fully funded. Typically this ends up being “gifts,” “vacation,” or a similar category. We determine which category to fund.

    If we allocated more than we have in income, we discuss which categories to take money out of. Time spent – 10 to 30 minutes

    This last step is where the bulk of our conversation takes place. By grouping the categories, we were able to get through the bulk of the budget in a matter of minutes. Sometimes you can’t avoid lengthy budget conversations when you have an unusual month or your financial situation changes. But on an average month we can literally get through our budget as a couple in 15 minutes.

Note: the times indicated don’t include the time spent to reconcile last month’s budget.

Little distinctions like this can really streamline the budgeting process over time. What tricks do you have for streamlining your budget?


Posted in Budgeting, Cash, Personal Finance | 5 Comments »

Making your cash last until the end of the month

Written by Sam on December 18, 2006 – 10:06 pm -

If you’re a regular reader of GFD, you’ll know I’m a big fan of using cash to control your spending. But up to this point I haven’t really gotten into a lot of detail about how I manage my cash. To tell you the truth, there are almost NO tools out there for managing a cash-based budget other than the common envelope. Wallets are great for carrying a single chunk of cash, but they don’t help you organize cash by categories. This leaves a lot of room for creative thinking about how to manage your cash.

Greg over at StackBacks.com has a unique and GTD friendly way of managing cash involving envelopes, index cards, and paper clips. His method is a great way of divvying out your cash so you don’t spend it all at the beginning of the month, leaving you living like a pauper at the end of the month. It’s essentially a sort of cash tickler file (look under “Tools and techniques”).

Please let us know how you manage your cash!

Cash Allowance File


Posted in Budget, Budgeting, Cash, Finances, Money, Personal Finance, Spending, Tools | 5 Comments »

10 ways to save money this Christmas

Written by Sam on November 29, 2006 – 10:15 pm -

Another holiday post? Yes, Christmas shopping is on my mind. As my wife and I plan our Christmas budget, we’ve come up with several tips to help decrease holiday spending.

Christmas tends to be a very stressful time financially. Most people grossly underestimate how much they are really going to spend and often take on additional debt to pay for all the extra goodies. With a little planning and forethought, you can still have a full tree without taking on additional debt. Wouldn’t it be nice to not worry about money this holiday season?

1. Decide ahead of time how much you plan to spend on whom.

The first step is to create a spending plan on paper (or a spreadsheet) before you start shopping. By looking at all of your planned gift giving at once, you’ll make better decisions once you get into the thick of holiday shopping.

Sit down together with your spouse and write out a list of everyone you can possibly think of that you would want to give gifts to. Ideally, do this in a spreadsheet. Here’s a list to get you going.

  • Immediate Family
  • Extended family
    • In-laws
    • Cousins
    • Aunts and Uncles
    • Grandparents
  • Friends
  • Co-workers
  • Neighbors
  • Community/Civic Acquaintances
  • Church members
  • Include any people you want to send a Christmas card to

Keep adding people, even if you’re not sure you’ll give them a gift. The idea is to empty your brain and make sure you don’t experience the “oh, I forgot to get so-and-so a present” phenomenon. One of the reasons people overspend during the holidays is because they only budget for their family. Most people realistically buy many friends and acquaintances gifts as well.

Once you’ve completed your list, record how much you think you’ll spend on each person. If you don’t plan on buying a gift for a person listed, simply put $0. At this point, don’t worry about the total, just list what you’d like to spend. You’re estimates will be much more accurate if you think specifically what you’d like to get for that person rather than just putting a random dollar amount. List off to the side the item(s) you plan to buy. Of course, this process will be more involved when estimating planned spending for family members and may require multiple entries for one person.

Now add all the amounts together to see the damage. When my wife and I did this exercise, we were unpleasantly surprised at the total. It was way more than we were planning on spending.

Compare the total with the amount your were planning on budgeting for Christmas. Assuming the total exceeds your planning budget you need to either increase your budget or start cutting down your list. Keep reading for some great ideas at cutting your Christmas spending.

The whole point of this little exercise is to make your holiday spending explicit and conscious rather than spending blindly through the holidays only to find a very unpleasant surprise when the January bills arrive.

2. Give homemade gifts

It might seem cheap to give homemade gifts, but bare with me, they can be quite nice. When it comes to gifts for friends and acquaintances, it’s often the thought that counts more than the gift anyway. Here are a couple ideas.

  • Cookie/Cake mix – We’ve received this gift several times and always enjoy it. You just take a canning jar and fill it with the dry mix in the right measurements to make cookies or a cake. You can use either a store bought mix or “homemade” ingredients (flour, sugar, chocolate chips, etc.). You can spruce it up by putting a bow around the jar. Or, let your kids be creative and decorate the jar their own way.
  • Family history chart – We made our own 10 generation family history chart for my parents based on a design by Ancestry Circle. We printed it out on a poster-sized sheet and bought a $20 frame for it. It was a fair amount of work but was a meaningful and very unique gift. If you would like the template Adobe Illustrator file, send me an email. If you’re not looking to save money, Ancestry Circle will print a custom chart using your family history GEDCOM file for a reasonable fee of $79.95.
  • Make cookies or treats for neighborhood gifts. By simply giving a plate of cookies or brownies, you could give to all your neighbors for under $10.
  • Personalized Stationary – One year we made homemade stationary using Microsoft Word and a printer. We bought a ream of fancy paper and a box of matching envelopes. We had the paper cut in half at Kinkos and printed a design (using a word template) along with the person’s name on each sheet.
  • Pictures make great inexpensive gifts for family members. Do your parents and grandparents have your most recent family photo? There’s probably nothing they’d rather have.
  • Burn family photos or family history to a CD. Total cost: less than $0.10 each.
  • Give homemade gift certificates. You can give an elderly person in your neighborhood a certificate to mow her lawn or shovel her snow. Give a certificate for free baby sitting to acquaintances with children. Give your spouse a certificate for a massage. Your creativity is your only limitation on this one.

3. Shop online and use RSS feeds to find great deals

It’s still not too late to find great deals online in time for Christmas. Learn how to use RSS feeds for shopping to be notified when an item you want goes on sale. Many online stores allow you to make purchases just days before Christmas and still have them shipped in time for the big day.

4. Buy used when possible

Using RSS feeds makes it easy to find items for sale on eBay or Craigslist. This is particularly great for younger children who don’t care if an item is used. Would you rather pay up to $50 for a Little Tykes basketball hoop or $5? For adults, electronic items can make great used gifts. People upgrade so often, you can find great deals on computers or mp3 players that are still in perfect working condition.

5. Give your “Favorite Things”

My father started this tradition and my wife and I have adopted the idea. By giving inexpensive items that you love and use everyday, not only will the gift be more meaningful, but the recipient will think of you whenever he/she uses the gift. By giving a gift with meaning, you deemphasize how much the item cost. Last year, my sister gave me a little packet of some of her favorite things that included her favorite gum, mints, and beverage. I loved it. It was neat for her to share those things with me and I could have cared less how much she spent.

6. Find great children’s gifts for under $5

Target, Wal-Mart and any dollar store have some great gifts for under $5 that kids love. Target and Wal-mart both have great generic-brand toy packages in $5, $10, and $15 increments. These toy sets include balls, play doctor kits, die-cast cars, doll sets, toy trucks, a velcro target and balls, and train sets.

7. Tell your family you’re trying to get out of debt

Let your family and friends know that you’ll be giving small gifts, or no gifts at all, because you’re trying to avoid debt during the holidays. Your family and friends will respect the fact that you’re aggressively trying to get out of debt and you’ll get the added benefit of their support. Of course, only do this if it’s true.

8. Make an agreement with others about gifts

The fact is, your friends and family are probably stressing about Christmas finances just as much as you are. Approach them with the idea of making a pact to not exchange gifts this year or to keep the gifts within a certain dollar amount. You’ll both be relieved to not have high expectations hanging over your heads about what to give and how much to spend.

9. Buy them Total Money Makeover for $10 a piece

Dave Ramsey sells his hardcover “Total Money Makeover” books for $10 a piece if you buy a pack of 10. Note: the link to his online store was broken as of this writing. I’ll keep checking and post the link when it’s working. While it might seem like a lot to drop $100 on books, you’ll actually be giving a $17 gift for only $10 while taking care of 10 people on your gift-giving list. Plus, books make the best gifts in my humble opinion.

10. Use cash and/or save receipts


I’ll admit that it’s tough to use cash when you’re making so many purchases in such a small time frame. Credit and Debit cards really are more convenient. But if you really want to guarantee you’ll spend within your means, you’re best off dividing up your Christmas funds and giving cash to each family member. Once they’re out, they’re done spending.

If paying cash is not realistic for you, be sure to save all your receipts. Empty the receipts from your wallet at the end of a shopping day and put them in an envelope for safe keeping. Before you wrap your gifts, you can review how much you spent and, if you’re over budget, you can decide which gifts to return. With all the gifts in front of you, it’s easier to make trade-off decisions about which ones to keep. When you’re at the store in a shopping frenzy, it’s much harder to make such a level-headed decision.

Decide not to go into more debt this holiday season

Most importantly, make a decision along with your family not to go into additional debt during the holidays. You don’t want to be “experiencing” Christmas long after it’s over and the thrill of new toys has faded.

What do you do to save money during the holidays?


Posted in Budgeting, Cash, Finances, Money, Personal Finance, Saving, Spending | 11 Comments »

How to become a personal finance “black belt”

Written by Sam on October 3, 2006 – 11:56 pm -

David Allen in “Getting Things Done” compares productivity to the martial arts. He gives instruction on how to become a black belt in your personal productivity with a “mind like water” that allows you to handle anything that comes your way with a balanced response. When a stone is thrown into a pond, the water reacts with perfect balance. It reacts just enough to disperse the energy, no more, and then returns to a calm state. It doesn’t over or under react.

Becoming a black belt and having a “mind like water” in your personal finances is very similar. It means you can take whatever is thrown at you without knocking your finances out of control. You can respond to any situation with perfect balance. Unexpected events or changes in your finances, good or bad, can be handled with optimum efficiency, and little or no stress. It means you can direct the flow of money where you need it almost effortlessly.

In an effort to help people gauge where they are in their personal finance development, I’ve defined what people at the various “belts” might look like. Where are you?

Read more »


Posted in Budget, Budgeting, Budgets, Cash, Couples, Credit Cards, Emergencies, Finance, Finances, Money, Personal Finance, Relationship, Relationships, Saving, Spending | 20 Comments »

A friendly challenge – Credit Cards vs. Cash Showdown

Written by Sam on September 26, 2006 – 7:06 pm -

I’m a big fan of Ramit Sethi’s personal-finances blog iwillteachyoutoberich.com. It’s no secret that he spends everything on his credit card (paying it off every month) and is opposed to a cash-based budget. About 4 weeks ago, I read a transcript from a chat he conducted and found the following question and response:


Q: what do you think about not spending anything on credit cards? everyone else is in trouble so why not use cash only!”

A: that advice is not for smart people who read personal-finance blogs. i hate that ad-vice because it panders. it assumes, “everyone else mismanages credit cards, so you probably will too” ARE YOU A MORON I WANT TO YELL answer: no.

For the past few weeks I couldn’t get this statement off my mind. It’s one thing to have a strong position ;-) . It’s quite another to insult those who follow a perfectly legitimate and arguably superior system of financial management.

To resolve this issue, or at least let the blog-reading community decide for themselves, I challenge Ramit to a good-spirited showdown: Credit Cards vs. Cash. Ramit can present the credit-card arguments and I’ll present the cash/debit arguments. The readers on each side can also chime in. I read a similar showdown about productivity a while back and thought it was useful.

Please leave a comment and let us know what questions or views do you have about credit cards vs. cash? What questions would you want to see addressed if a showdown takes place?

If Ramit accepts we’ll decide the terms, time, and format. Let’s have Ramit express his spirited feelings in a more articulate and useful way.


Posted in Budget, Budgeting, Budgets, Cash, Credit Cards, Debit Cards, Finance, Finances, Money, Personal Finance, Spending | 26 Comments »

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