Yesterday I outlined the various tools you can use to track your budget. At the end of the article I mentioned how our credit card simplified the budget and I wanted to elaborate on that a bit more. Not everyone takes debit cards so there were times when we would have to pay cash for something (e.g ordering take-out). Then there would be times when there weren’t enough funds in our chequing account for a debit transaction at the grocery (see my article Optimize your Bank Interest through Automation as to why). My fiance and I would pay with cash from our personal accounts when these events occurred. We would then either take the money we were owed from our joint account or when we moved our individual share of the bill money to our joint accounts we would deducted the money owed to us. This became a nightmare to track MS Money.

Why was it so difficult to track in MS Money?

I don’t like to enter in transactions manually. I love that all of the transaction in MS Money correlate exactly with a transaction on our bank statements. This makes finding discrepancies simple. This all goes to hell when you start dealing with cash especially when the cash amount withdrawn from our joint account is to cover multiple cash transactions. I was working around this by splitting the transactions that were downloaded to MS money. I did this so that visually the transaction aligns with my bank statement but portions of the single a transaction got placed into the correct spending categories so that my budget got updated correctly. Every time I did this I never seem to do it exactly the same way and my spending categories weren’t starting to balance correctly in MS Money.

How did our credit card help?

We no longer had to make sure there were funds in our chequing account to cover our variable expenses, we could also order items online, or we could order take-out food since everything was going on our credit card. This virtually eliminated the need to monitor messy cash transactions. All transactions were recorded on our credit card bill which we download to MS money. This made balancing all of out spending categories simple and the reports we generated are no longer skewed by the cash transactions. I now had my one to one transaction correlation between my bank statements and MS Money.

Isn’t it dangerous to use a credit card?

A credit card is like any other tool, in the right hands it simplifies life, in the wrong hands it can cause a lot of damage. As long as you update your budget weekly you’ll be able to stay on top of your credit card spending. If you find yourself constantly going over your budget then go back to manually tracking your transactions until you develop some more self control because a credit card is not your budgets best friend in this case.

Do you use a credit card to simplify your budget? Has it ever gotten out of control?

-mfd-

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One of the key elements to successfully implementing a budget is being able to track your transactions. There are several ways to go about doing this and I wanted to go over the Pros and Cons of each of them:

Paper and Pencil – The easiest and cheapest to implement but requires the most amount of work. You’ll need to retain all of your receipts, categorize all of you transactions and manually tabulate results.

Pros
- Easy to use
- The perception of having a greater stake in your finances
- Very little cost

Cons
- Tough to track
- Requires a lot of manual calculation
- Difficult to back up
- No automated reports

Spread sheet programs – There are several pieces of software you can use: Microsoft excel, Open Office Calc, or   Google Docs.  If you set this up correctly a lot of the calculations can be tabulated automatically but you still have to enter your transactions manually (for the most part). There are however some pretty interactive spreadsheet templates you can download that make this process a bit easier such as Pear Budget’s Excel template.

Pros

- When set up correctly much of the calculations can be automated
- Readily accessible as most PC’s have excel (if you carry the file with you  on a USB key)  or if you us Google Docs  which can  be accessed via an internet connection
- For the most part this solution is free since Google Docs and Open Office Calc are free
- Digital format allows for easy data backup

Cons
- Still requires lots of manual input

Personal Finance Software – Some of the most popular software is MS Money and Quicken (a free alternative is GNUCash). There is an initial learning curve to the software that is much steeper than spreadsheets. If you don’t set up your accounts correctly than you may still need to collect receipts and enter a lot of the information manually. There is also a plethora of reporting options that makes your financial history easily accessible.

Pros
- Most financial institutions support the file formats for downloading transactions to these applications
- Once set up most of the calculations are automatic
- Ability to quickly generate reports based on various criteria
- Digital format allows for easy data backup

Cons
- Costs money
- Can be complicated especially when you are initially learning how to categorize your transactions
- Still requires some manual intervention to download transactions and properly categorize them (In the US the software can access your accounts for some additional automation)
- May not be easily accessible everywhere as most computers may not have the software installed.

Websites – There are websites out there that provide budget functionality like Pear Budget which currently cost $3 a month to track your budget and requires a lot of manual input. We’ll focus more on the feature rich site www.mint.com since it’s currently free. It has a lot of the functionality of Personal Finance software plus new features are always being implemented like phone alerts.

Pros
– Your budget data can be easily accessible from any computer with an internet connection
- Once set up most of the calculations are automatic
- Ability to quickly generate reports for various criteria
- Provider backs up data (hopefully)
- Transactions are automatically gathered and budgets are updated
- New features are always being developed

Cons
- May take some time to learn how to use correctly
- May not be free forever
- Privacy and security are a big concern!!!

What do I use?

I personally use MS money. Once I sorted out how all the transactions should be grouped and represented in the software so that various categories balanced everything got a lot easier to manage. Tracking cash became difficult but getting a joint credit card helped resolve that. I usually download my transactions once a week and most of the stores I shop at on a regular basis sort themselves automatically. I find that if I wait longer than a week then I forget what some of the transactions were at new stores that I’ve never shopped at before. Overall I’ve been happy with  it’s ability to track all of our expenses. On a few instances I manage to sort out some financial discrepancies by running many of the available reports.  Its still not as automated as I would like but its the right solution for me.

What are other people using to track their budgets? What do you like/dislike?

-mfd-

P.S. My article Making a Budget that Works was listed on the Carnival of Personal Finance 195th Edition over at Stocktradingtogo.com and my article The Cost of Being Sick was listed on Money Hacks Carnival #55 over at MoneyNing . Thank you!

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Budgets are one of those things that everyone wants to do but very few are successful at it. They require work and discipline. People fail to realize this when they set out to get their monetary house in order. I hope these guidelines help:

Know your Income - You can only spend what you make so the first step is to calculate your income.  Finding a $100 on the street is not income so only include reliable income streams to help keep your budget within practical limits (that means exclude overtime and holiday pay as well).

Calculate your Expenses - Generally expenses fall into two categories:

1 – fixed expenses: These include things like rent, insurance, car payment, etc. These are the bills that you have to have in order to live your life and never change month to month.

2 – variable expenses: These are things like cell phone, groceries, dining out, etc. They are never the same every month and change depending on the standard of living you want.

Track your Expenses – Don’t think your are capable of tracking your expenses in your head because you’re not (unless your Matt Damon in "Good Will Hunting").  Develop a system. Keep all of the receipts and record the expenditures daily.  Use software like Excel or MS Money if you are so incline.

Don’t over Budget – The big reason people stop following budgets is they over budget. Even if you think you can live off of peanut butter sandwiches you shouldn’t budget as if you were because its not practical. Eventually you’ll get sick and tired of your limited options and will drop the budget out of frustration. Always calculate a bit more into your budget because in the end you don’t have to always have to spend everything that your budget allows for.

Include Money for an Emergency Fund – Unexpected expenses happen and you should be ready for them. If you don’t have an emergency fund and something comes up then you’ll most likely have to abandon your budget to see it through.  Depending on the severity of the issue you may never implement your budget again. Set some money aside monthly and you’ll save the budget and your sanity.

Don’t forget Fun - You only have one life and you should live it. Set some money aside to do the things you enjoy. This could be a trip, dinning out, or just a simple movie. Always add a little extra to the pot to live life because that’s what we are here for.

-mfd-

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