TL;DR > The ideal budget is simple, maximizing the result while minimizing the required effort. The first place to look is the number of accounts. Second, is the number of categories. Third, is consolidating as many outflows as possible into a single cash withdrawal.
I’m not talking about the percentage of your take-home that should be spent on groceries.
Your setup will dictate your workflow, so I want to talk today about the setup. Setup consists primarily of accounts, categories (and a bonus: cash).
And ideal budget setup, is a lean budget, but only to the extent that the budget is still delivering value. When I budget, I’m:
- Aware, which means my money is aligned with my values. That brings me a lot of peace and contentment.
- Looking forward, so I’m ready for the “unexpected”
- Flexible, understanding that life is anything but “expected” ;)
- Liberated, because I’m not living right on the edge financially, from paycheck to paycheck.
Those are the values I get from budgeting. The focus of an ideal budget is to maintain those values, while cutting anything possible. Maximum value for minimum effort. To that end, I present the lean budget, and my ramblings as I work through it with my own personal budget.
My accounts look pretty good. What we’re going for here is fewer. Less is more my friends! At the moment I have:
- Credit Card
The savings account will be closed yesterday. I forgot it was there. The bank required me to set it up when they upgraded my checking account. That leaves me with:
- Credit Card
I like it. All last year I operated with:
I didn’t like that. All of our funds were in the Checking account (the car fund, where we’ve been saving for about five years, the Christmas fund, the property tax fund…). Our checking balance is abnormally high (compared to most) because we keep all of our savings there.
I became worried that our debit card would be swiped (the bad kind of swiped) and we’d be drained of everything, having to sort through a mountain of administrative work to get our money back.
Just yesterday a friend told me he’s fairly certain his debit card number was taken. He’s noticed some charges that shouldn’t be there…it’s going to be a nightmare for them.
Do any of you have direct experience in dealing with fraudulent transactions on a stolen debit card vs. a stolen credit card?
Hence our use of the credit card.
One way to still have “access to money” if your checking account is ever drained is to use a credit card in the crunch, have the funds restored, and pay off the card. I just don’t like the idea of using a credit card without having the funds on hand to pay it off at that very moment.
We can’t be bothered. They’re there, but that has absolutely no bearing on our decision to use a credit card. I can’t remember the last time I cashed in our cashback. One of these days, I’ll by a yacht with it.
Less is More
What’s the big deal with having two or three checking accounts, or two or three credit cards? It’s all in the administrative overhead. That’s one more account you have to import transactions from, reconcile, search for discrepancies… when you’re entering a transaction on your phone, that’s one more decision you have to make: “Which card did I just use?” Or when you’re at the store purchasing: “Which card should I use?”
I’d rather just not have to ask myself those questions, and do those administrative tasks.
Bear in mind, those administrative tasks add no direct value to budgeting. They’re necessary evils so you can make sure you’re aware, and that your records are complete (so you can budget accurately). Knowing your account balance is accurate to the penny is only useful to the extent that you also budget to the penny.
We try and make the software smart, and remember what account you used if you’re say, standing in Joe’s Grocery Store with your phone, but wouldn’t it be nice if things were simpler because they were…actually simpler?
I’m a big proponent of fewer accounts. The budget is the answer to the I-have-ten-different-savings-accounts-because-I-have-ten-different-savings-goals dilemma. You’ll love it once you begin to trust your budget.
If I were wearing long sleeves, I’d roll them up, because this is going to take some work. My current budget file goes back to October 1, 2008. I can see now, that I’ve experienced a bit of category bloat.
I have 38 categories.
More categories isn’t bad, to the extent that you gain awareness that drives decisions from your extra granularity. I’m noticing some spots where I gain no awareness right off the bat (my apologies for the bathroom talk for the next few paragraphs):
- Personal: Diapers & wipes
- Personal: Hygiene, Hair, Other
- Personal: Miscellaneous
- Personal: Gifts
- Personal: School & Sports
- Personal: Piano
- Personal: Subscriptions
- Personal: Business Expenses
This can be improved. I’ll combine diapers with hygiene & hair. Let’s call it…toiletries. I think we used to break out diapers because we cared out much it cost. Thankfully, it’s less of a line item for us now. The question to ask is:
Do I care to know how much I’m spending in this particular category? Will it 1) help me spend less (frivolous expense) or 2) help me spend more (a noble goal) to track this separately?
The School & Sports and Piano categories can be combined. The kids started piano (as did I) about a year and a half ago. I know we want the kids do piano (even if they don’t know they want to…as much) so is it really necessary for it to have its own category? I don’t think so. We’ll combine these two activities into Kids’ Activities.
The subscriptions category is for Lifelock, Netflix, and Hulu Plus. Just looking this over today made me cancel Hulu Plus and Netflix. I like those when I’m on the treadmill, but should probably listen to books on tape instead. Honestly, Lifelock is questionable for me. How do you know if it’s worth it? :) For now, Lifelock can be relegated to the Miscellaneous category.
Now we have:
- Personal: Toiletries
- Personal: Miscellaneous
- Personal: Gifts
- Personal: Kids’ Activities
- Personal: Business Expenses
Five instead of eight. Not bad. Remember, your evaluation of the usefulness of a category comes down to whether you really, truly care how much you’re spending in a particular category. Another example:
- Recreation: Dates
- Recreation: Family
- Recreation: Hers
- Recreation: His
- Recreation: Vacation
The His/Hers categories must stay, because Julie and I like to have our own money, and if they weren’t separate well, that defeats the purpose. Vacation is for specific vacations we want to take, with target dollar amounts. So I’m comfortable keeping that one separate… the Dates and Family though… those really can be combined. I’m not deriving any value in knowing that I spent X on Dates, but Y on Family stuff. I’ll start a Recreation: Dates & Family category, and hide the other two.
(That’s the quickest way to “merge” two categories. The more tedious way, if you don’t want hidden categories, is to bulk categorize one category’s transactions to be the other category, then delete the empty category. You’ll get a prompt about how you’ve budgeted to it, and those budgeted amounts will be permanently lost, and you can click Continue). Then you’ll notice that your Available is, perhaps, all out of whack because you no longer budgeted for the New Category to account for all of those transactions you just sent to it… just budget the amount needed to get it out of the red and you’ll be fine. The unbudgeted money (created by deleting the category) flowed all the way through to your current Available number. See, I told you it was quicker just to hide the old categories.)
I went from five to four there. Not bad, but not too great either.
I have a master category called Insurance, with three subcategories:
I budget the exact same amount into each of those categories each month. So… why not combine them? Is separating them helping me spend less on any of those insurance items? Not at all. I don’t mull over those costs each month during our budget meeting. They’re essentially fixed as to their necessity, and their amount is fixed for a long period of time. They’re ripe for consolidation.
But I don’t want to have a single master category with a single sub inside it.
I’m going to rename our Housing master category to Bills and do some serious category surgery there, consolidating, and adding the insurances. Here’s what I have currently (marked here as variable: v and fixed: f, not marked in my actual budget):
- Housing: Gas (v)
- Housing: Property Taxes (f)
- Housing: City Utilities (v)
- Housing: Furniture, Appliances, Improvements (v)
- Housing: Lawn & Garden (v)
- Housing: Other (v)
- Insurance: Car (f)
- Insurance: House (f)
- Insurance: Life (f)
What I have now:
- Bills: Utilities (combined Gas and Water/Garbage, both variable, but manageable as such)
- Bills: Fixed (includes property taxes, LIfelock and the three insurances)
- Housing: Interior (was furniture, appliances, improvements)
- Housing: Exterior (was lawn & garden)
I have to keep the Housing ones separated as interior/exterior because I’m in charge of the exterior, and Julie’s in charge of the interior. If we meshed them all up, well, that would get confusing.
Notice that the Bills: Fixed category now includes two Rainy Day items (Property Taxes and Life insurance premiums), along with three monthly items (Car and Homeowner’s insurance, and Lifelock). Does that matter? Not in the slightest. I have a note on that category that tells me the amount I should budget each month. I get the same result as before, but now I’m typing one number instead of five.
- Health: Doctor & Dentist
- Health: Drugs
But as I look back through the Drugs category, I quickly realize that we almost never use it. I’ll consolidate down to one and move it to the Bills master category.
We also have:
- Clothing: Kids
- Clothing: Adults
Do I really care to know what I spend on kids’ clothing vs adult clothing? No. Consolidated, and moved to the Personal master category. I just looked at my category spending report and clothing represents less than one percent of our budget. It probably doesn’t even needs it own category… I’ll add it to Personal: Toiletries and rename it Personal: Clothing & Toiletries. Excellent. Two more categories bite the dust.
In Transportation we have:
- Gas & Oil
- License & Taxes
- Repairs & Tires
I do want to know what I’m spending on repairs & tires because that will dictate when we finally buy a new car. The license & taxes category is used for the renewal cost of our vehicles (a tax masked as a registration). It’s fixed, so I can bump it up to my Bills: Fixed category.
I’m down to 25 categories. I’d like to get down to 10, but am not sure that’s even possible. Well, I should say, it’s perfectly possible, but I think I might start losing some budget value at that point.
Your category structure all goes back to that question from above. You need to justify why you need to track that line-item separately.
Bonus: Use Cash to Simplify
One sure-fire way to setup your budget so it’s simple, is to use cash. NOT a cash account. Cash accounts are quite the opposite. They’re tedious and error-prone.
As I scan my budget categories, certain ones jump out at me as certainly cash-able:
- Gifts (unless purchased online, so let’s strike this one)
- Clothing & Toiletries
- Miscellaneous (probably)
- Babysitting (I added that one to Personal, but didn’t write about it)
- Dates & Family
- Repairs & Tires
The question then becomes, are there any of those categories that you’d be comfortable consolidating into one, big pile of outflow? Because that’s what we’re going to do :)
Let’s say I still want to track Babysitting and Repairs & Tires separately, I could consolidate the other five categories into a new cash category. At the beginning of the month (or whenever), I’d budgeted the cash needed (let’s say, $1,500), then go to the bank and withdraw the money. I’d then have a single outflow in my checking account for what was probably 15 outflows before. We consolidated accounts, categories, and now a lot of outflows.
I’d also never overspend if I only used what I had on hand.
I would not set up cash envelopes, because I tried that years ago and it was a cumbersome hassle. That would defeat our maximum result for minimum effort mantra.
If I noticed the budget sliding…I’d start breaking things back out of that slushy cash category.
I’m pretty intrigued by the cash idea. If I take the plunge, I’ll write up a post-mortem.
This was long. As I wrote this, I actually manipulated my budget, thought through the simplification process, and dumped it here into this post. Hopefully you grabbed something insightful from it!
Do you see any ways you can simplify your budget setup? Share in the comments below!