Three Parts of a Practical, Effective Budget

Many times I've recommended creating a personal budget to help you meet your financial needs. It doesn't sound too difficult, does it? Believe it or not, the hardest part is finding the discipline to stick with it and give it the care and feeding it needs to be effective. It's easy to add up your income and divide it across all of your expenses/savings goals. But budgeting is more than that. In this post, I'll tell you the three important items that you'll need to have an effective budget: a Budget "Thermometer," Running Total Tracker, and Cash Planner.

1. Budget Thermometer








Here is a sample of my budget thermometer for September. It is simply a screenshot from my favorite free personal finance software, mint.com.

Coming up with categories and their monthly allowances is an important first step and the part of your budget that you will pay the most attention to on a daily basis. Mint.com not only allows you to create your budget, but it will show you a daily thermometer to display how well you're adhering to your plans. Because it's integrated with your bank and credit cards, each day it will classify your spending transactions and tell you whether or not you're on track to meet your monthly goals. If you spend half of your grocery budget by the 5th of the month, Mint will alert you so you can rein in on your shopping until you're back on track. As you spend money in a category, your little "thermometer" will fill in. Its color will change if you're on pace (green) , not on pace (yellow), or over your monthly budget.

I can't tell you how to split up your income each month, but here are some tips:

- Before creating your categories and their associated monthly allowances ($500 on groceries, $200 on restaurants, etc), take a look at where you currently spend your money and don't just pull the numbers out of thin air. If you're using personal finance tool like Mint, Quicken, or Money, you should be able to see a pie chart that shows you how you've spent your money in the past. But make sure your past transactions are classified correctly!

- Next, establish new goals for each of your categories. It's OK (and encouraged!) to spend less each month in certain categories than you have in the past. If you spent $400 last month at restaurants and want to bring that down, this is the perfect time to set those goals. Make sure you're using reasonable and achievable estimates for everything, but don't be afraid of a challenge.

- Don't forget about your savings goals! If you're saving up for something specific like a vacation or an engagement ring, start implementing those goals into your budget as categories after you've figured out what you'll have left over. Whether it's $10 per month or $500 per month, it's important to put money away for the things you'll need in the future.

- Don't budget down to your last penny. We're dealing with your personal finances; you're not an accountant. I like to leave out 2.5% of my monthly net income (after-tax pay) unaccounted for. There's no doubt that at least one of my expense categories will go over one month (as you can see above), so it's nice to have a little buffer for such an occasion without throwing off my other goals.

- If there are expenses that aren't incurred monthly, like car insurance or, in my case, my dog's annual vet visit, split them up in terms of months. Divide your six-month premium by six and use that as your monthly budget. This, of course, means that you'll be under budget some months, and over budget the months that the expense is paid. This point illustrates the need for the other two pieces of an effective budget: a Running Total Tracker and a Cash Planner.

2. Running Total Tracker
Unless you're an incredibly disciplined, you're not going to spend exactly the same amount of money each month on all of your categories. Certain things like your car payment, mortgage, etc are fixed, but other expenditures like groceries, clothing, and utilities will vary a bit. This is why it's important to track running totals.

Mint does not have running total tracking functionality, so I do it myself once a month in a spreadsheet. Two of my columns are identical to my categorical budget columns that are tracked by my personal finance software. One column has the identical category and the next has the monthly budget. Each month, I evaluate my monthly adherence to my budget and note the amount that I was over or under for each category in a new column; I have columns for each month that I have been using the spreadsheet. If my restaurant budget is $140 and I only spend $90 in September, my September column would have a green "$50" because I spent $50 less than budgeted. If I had spent $150, my September column would have a red "$10" because I spent $10 more than budgeted.

Next to the first two columns that display spending categories and their monthly allowances, I have a third column with a number that is either red or green. This number represents the sum of all of the monthly over/under amounts, which I call the "running total."


The running total is important for me to know how well I'm adhering to my budget over time. Also, it keeps track of the balances of certain non-monthly expenses and can help when you create next year's budget. If you see that you're constantly spending more than your budget on gas or groceries, you might need to rethink your amount.

Additionally, the running total column can indicate whether or not my wife or I can afford greater than normal spending in a certain category. Recently she said she wanted to go clothes shopping. We hadn't spent any money on clothes in a few months, so when I checked our running total for clothing, I saw that we were about $123 in the green. Because we hadn't spent our $50 clothing budget in a few months, she was able to go and spend more money on clothes this month. When I update my spreadsheet next month, the running total will be back to zero.

3. Cash Planner
Our incomes and expenses aren't always regular and incremental. There are times of the year when we receive bonuses or incur extra costs. The third piece of budgeting is important to help you determine how much cash you'll have after receiving irregular income (possibly after getting your tax refund) and after paying your abnormal expenses (like the January post-holiday credit card bill).

This budgeting tool is also something that I track manually in Excel. Across the top are columns indicating two periods per month -- one ending on the 15th and the other on last day of the month. It's up to you to determine how small your time increments will be. Depending on how often you're paid, you can have columns represent every Friday from this day forward, or simply the end of the month.

For each column, I have a series of rows for my expenses and incomes. My income is a row and my wife's is another. My expense rows resemble my budget categories, but unlike my running total spreadsheet, they don't follow them explicitly. This is because not all of my expenses are paid on the same day of the month. Many of them, like groceries and my XM bill, are put on my credit card. Since my credit card bill is due only once per month, I have a single row for "credit card" that includes many of my regular expenses. Other expense rows include one for my mortgage, my car loan, and my student loan payment.

Two other important rows include "Additional Income" and "Additional Expenses." These will be places where you can input anticipated fluctuations in your income or expenses. If you know you're planning on spending $350 next month on your quarterly student loan interest, you can plan for that. If you're getting a big tax refund in the spring, put that in your April column. Add as many columns as you're comfortable with. If you want to plan out six months ahead, you may. If you only want to plan two months ahead, that's fine, too.

Next, for each period column, I enter the expected amounts for each row (if any) that will be applied during the period. For example, my mortgage and car payment are paid on the 10th of each month. For the column labeled 10/15 (representing the period from October 1st - 15th), I will enter the amount of my monthly mortgage and car payments as well as any income I expect to receive. Since my credit card and student loan payments aren't due until later in the month, those expenses will show up in the second column for the month, 10/31. Similarly, because my wife is paid only at the end of each month, I'll enter her income only for the second period.

At the bottom of each column, I do a little math to estimate my cash balance. I take the cash balance from the bottom of the previous column, add the incomes from the current column, and then subtract the expenses from the current column. This will result in my new expected cash balance for the period. For example if I had $5,000 at the end of the last period, received $1,000 of total income, and incurred $800 of total expenses, my new cash balance would be $5,200.

While the Budget Thermometer and the Running Total tracker are useful for tactical budgeting, the Cash Planner is great for strategic cash management. If you're trying to develop an emergency fund of a few months' salary, the cash planner will give you a good idea of how long it will take to reach your goal.

As you can see, there's more to budgeting than just coming up with monthly allowances for spending categories. To budget effectively, you must have reasonable monthly goals (derived from your past spending), the ability to monitor your adherence to those goals, a willingness to log your monthly adherence (running totals), and a view into the future to know what your financial situation will be and how soon you can achieve your goals.

What are your own personal budgeting strategies?

Free Legitimate Websites That Actually Help Me Save Money

Here on tepom.com, I encourage you to spend less money and try to give advice on where to put what's left over. Today I'm going to share some free websites that actually/legitimately/genuinely help me and my family save money.

Upromise - If you're ever going to pay for someone's education, this is a must. It's a free service that rewards you with cash back for making purchases from its marketing partners. The only catch is that the money needs to be used to pay for college, which is enforced by placing your cash rewards into a 529 college savings account. Prices aren't marked up, you retain promotional discounts, and you can shop normally as you always would. There is a neat little toolbar that will detect when you're at a partner's website and will automatically give your reward. For example, ShoeBuy.com claims to have the lowest price on the internet for shoes and they also a partner with Upromise. Last week, I bought a pair of sneakers at an already low price, received ShoeBuy's 20% Columbus Day discount, and then another 10% cash back into my Upromise account. On average, Upromise deposits $270 per year into my college account, and I don't have to change my shopping habits one bit.

You also get credit for shopping at brick-and-mortar stores and restaurants by registering your credit and debit cards with Upromise and using them at the establishments. Additionally, by making travel reservations online, you will receive a percentage back after your stay is complete; I get 3% back on all hotel stays in addition to the other reward points offered by the hotel. And if I had used Upromise before I bought my house, I would have received about $700 for using a Century 21 agent.

Again, Upromise is completely free and easy to set up. You will earn between 1-10% cash back on your purchases and you can continue to shop like you always have for the best prices on goods, services, trips, and more. If you happen to land at a Upromise-sponsored business, you automatically receive your reward. If not, no big deal.

Mint.com - I've spoken of Mint several times on my site. It is a free personal finance website that provides software similar to Quicken, but with a much nicer and simpler user interface. Mint is incredibly easy to use and quite powerful, too.

If you have ever wanted to start a budget or to have a single view into all of your accounts -- be they retirement savings, college funds, checking and savings accounts, mortgage and auto loans, or credit cards -- this is the place to do it. By securely entering your username and password for each account, Mint will access the site and place your transactions into a single list. If you've got an issue with your spending discipline, Mint can keep it in check by showing you your up-to-date adherence to your monthly budget -- how much you've spent so far at restaurants, clothing stores, etc in a graphical, colorful "thermometer."

Also, be sure to check out their new Investments feature that will show how well your individual investments are doing compared to the rest of the market. And if you're interested in comparisons, you can easily see how much you spend at Starbucks or Walmart compared to other people in your city or state.

Craigslist - I hate to sound like a dirty college student, but you'd be amazed at the great deals you can find on Craigslist on all sorts of things. It's local, the stuff is inexpensive, it's super-duper easy and completely free to use for both buyers and sellers.

I don't use it as religiously as some, but before I make any major purchase, I'll look there. When I almost purchased an electric lawn edger at Lowes for $90, I bought the same one on craigslist for $25. When I almost bought the $500 bunkbed set for my guest room, I found the exact same one on Craigslist for $80. When I was inches away from buying a $2,000 digital piano in a music store, I found a comparable one on Craigslist for $400.

And Craigslist is a good way for you to get rid of your old stuff and make money. One Saturday when we cleaned out the garage, I made a Craigslist pile and then turned it into few hundred dollars cash within a week. It was nice to be rid of my old vacuum cleaner, a printer, and an extra coffee table, and I was happy to help some neighbors get their own good deals.

Please leave a comment with your own online all-stars that are legitimate, free, and will put cash in your pocket.

Reevaluating my Rewards Card

I've sworn by my rewards card since the day I had it. But a friend of mine and reader of my site named Steve emailed me the other day to talk up and recommend his own strategy. On this site, I try to be a big proponent of reevaluating our spending and habits, so I knew I'd be a hypocrite of I didn't at least check out his plan and contrast it against my own. Here's what he said:

I've got a schwab account for everyday checking that has the same benefits as the e*trade. Then i automatically send rent/utilities/insurance to a wachovia account and a percentage to a ing direct account for savings.

I use a chase freedom for gas/groceries/utilities for 3% cash back, and I have an Amex that's linked with my corporate amex for everyday expenses that gets points i can turn into airline miles or hotel points.

I've got to say that Steve has a great setup. A benchmark for rewards is about 2% -- anything more than that is tough to come by. And if those rewards are CASH then it's an even better deal.

Before I go any farther, let me reiterate a point I made a couple of months ago and say that unless you pay off your balance in full every month, you shouldn't use a rewards card. They tend to have higher interest rates than non-rewards cards, so in the long run, those rewards might actually cost you a lot of money.

When you're picking out a rewards card, try and figure out what the actual value is of your reward. Cash is easy; points, not so much. If your card offers points instead of cash, figure out how much each of those points is worth in terms of cash and then make your decision. I use my Choice Privileges rewards card, which earns me free stays at Choice hotels. Here's how my points work out:

I earn two points per dollar on everyday purchases that I put on the card. So how much is that worth? I just looked at their online booking system and found a hotel room that would cost $150 per night plus tax if I paid for it, or 6000 points if I used my rewards. To earn 6000 points, I would need to spend $3,000 on everyday purchases (two points per dollar). So if $3,000 in everyday spending gets me $150 worth of hotel rooms, that means that my points are "worth" about five percent of my everyday spending. That's a bit nicer than a one, two, or even three percent cash back card.

I'd say that I travel slightly more than the average American, so I never have trouble using my points whenever I do. Yes, cash back is usually better than points because it has more utility (you're not limited in where you can spend it), but if you can earn twice as many dollars' worth of free hotels than you could dollars' worth of cash, it pays to have the points as long as you would have otherwise paid for those rooms at some point.

Steve also mentioned that he uses his American Express card so he can pool his points with his business expenditures. That's another great idea. Because points are essentially useless until you reach a threshold at which they can be redeemed, it's best to earn them in a place that has more than one "input." A second business card earning you points is a great example of this.

With my rewards card, I don't just earn points from everyday spending. I also get three bonus points per dollar spent at Choice hotels. I travel a lot for business -- sometimes for months at a time -- so these really add up with weekly (reimbursable) bills that often exceed $500. Additionally, these same hotel points can be earned by anyone that signs up, regardless of their method of payment. So Joe Schmo can sign up for an account online, make a reservation, and earn about 10 points per dollar spent, even if he pays cash. This is similar to frequent flyer miles -- anyone can sign up and earn them when they fly, but frequent flyer cardholders earn extra.

So how quickly do my points add up? Let's say that I spend $500 on a room for a weeklong business trip. I'll earn a) the 10 points per dollar that I automatically get for being part of the program, b) the two points per dollar that I earn for everyday purchases on my card, and c) the three bonus points per dollar that I get for spending money at a Choice hotel with my card. That comes out to be 15 points per dollar. Multiply that by the $500 that I spent, and I just earned 7,500 points -- more than enough for a free $150 night.

Choice also runs seasonal promotions that you see advertised on TV pretty often (does the Johnny Cash song ring a bell?). They just finished doing their "triple points" promotion, that will triple the normal 10 points per dollar. Also, because I have spent more than 40 nights at Choice hotels this year, I personally earn four extra points per dollar. So If I spent that same $500 during a promotional period with my preferred status, I would have earned 39 points per dollar, earning me 19,500 points, enough for more than three free nights at a $150/night hotel (assuming 10% tax, that's worth $495). That comes out to be virtually "buy one night, get one free!"

So my rewards card gives me 5% worth of free hotel rooms for everyday purchases. And because those points are going into an account that has multiple inputs, I can use them much faster. Other examples of these types of multiple-input accounts are Airline rewards, which deposit miles into your already existing frequent flyer account, or grocery rewards at specific chains that deposit points into an account that was opened with your little keychain grocery card.

So I'm generally a fan of getting a rewards card that gives non-cash rewards as long as two criteria are met: 1) the value of the non-cash rewards is significantly more than the amount of cash you could get back on a cashback card and 2) the non-cash rewards will be spent on something that you would have otherwise paid for in the future, like hotel rooms, plane tickets, groceries, etc (NOT random crap in an all-points Sharper-Image-like catalog).

As far as my friend's banking choice goes, I have to say that it's a wise one. The 3% interest is high and it has no minimum balance. Today my E*Trade pays me 2.8% on my checking and 3.3% on my savings, with a $5,000 minimum balance on the checking account. Technically, the Schwab account is better than my E*Trade account because it doesn't require a minimum balance. However, I like the fast transfers to my brokerage and IRA accounts that I hold with E*Trade. Though there would technically be value in switching my account, it would be too small to justify the effort of switching.

If you're choosing a rewards card of your own, look for the best offers and try and figure out where you spend most of your money. Use Mint.com to determine this, as they'll tell you how many times you've visited a particular business and how much you've spent there. That'll be a good place to start when determining which rewards card is best for you.

Thanks for your comments, Steve.

Easy, free, accurate online personal finance tools.

This week, I started researching alternatives to Bank of America's MyPortfolio program -- the main reason that I'm keeping an account with BOA. After doing a little research and with the help of some friends, I found a few websites that provide a comparable service for free. Now, I'll need to think long and hard about whether I want to keep my BOA account or not.

There are few sites that I found that will synchronize your finances from all of your financial institutions and give you a compiled list of transactions that populate a spending profile. This repository of transactions will drive a graphical breakdown of your spending, showing where all of your money is going.

My favorite site so far is Mint.com. They boast that users are able to set up an account in five minutes and instantly be given suggestions on ways to save money (usually in the form of an opportunity for a lower APR credit card or a higher APR bank account). The interface is simple, and the extra features are helpful and relevant.

I particularly like the budgeting feature. After manually entering your monthly spending goals for all expense categories (some initial goals are set to values that represent your last three months of spending), Mint will tell show you how well you're adhering to your budget so far. If you're on track to spend more than your monthly budget (let's say you spent $100 of your monthly $150 gasoline budget in the first week of the month), you will be alerted by a simple change in color of your budget 'thermometer.'

Another tool compared your spending in a given category to the spending of other Mint users in other parts of the country. It will even compare your spending at a specific store to any other part of the country. I'm amused that I spent slightly more at Waffle House last month ($19) than that average American ($17). I would love to see a feature that shows you where people in your area that spend less in a certain category do their shopping. For example, if you spend 25% more than most people in your area on groceries or internet service, wouldn't it be neat to see where everyone else does their shopping or from whom they buy their internet service?

My main criticism of Mint is its inability to show my equity in my real assets. Some of Mint's competitors, like BOA's MyPortfolio, integrate with zillow.com to estimate your home's approximate value. Just because I owe tens of thousands of dollars on my home doesn't mean that I have a negative net worth. Because my house is worth more than I owe, it should improve my net worth. The same story goes for our two cars. I'd like to see an integration with a car valuing website like Kelly Blue Book. I own two cars; one is paid off and one is not. If Mint is going to take my auto loan into account when calculating my net worth, they might as well recognize that my car is worth something.

If you'd like to get a grip on your finances and have a single place to check in on them from time to time, I'd suggest visiting Mint.com. It's free and easy for those with already established online access to their bank, mortgage, auto loan, and credit card accounts.