Budgeting 101: Ditch The Fancy Apps!

Background: The management of your cash flow is the single biggest determinant of your financial success. Traditionally called ‘budgeting’ in personal finance, cash flow planning is the foundation of successful financial planning and should be the starting point for planning your financial ‘now’ and future. By increasing your cash flow, you can tackle debt, stop living paycheck to paycheck, be ready for emergencies, and save for future purchases and goals. Without a proactive plan, your personal economy is rudderless and can easily veer off course.

Not having a system in place for evaluating where resources are allocated would not be a prudent business management decision. The same can be said of tracking income, expenses, and savings for your personal household. Your personal household should be managed just like a successful business venture: periodically assessing your cash flow for strengths, weaknesses, opportunities, and threats.

Traditional Budgets Do Not Work: Setting up a traditional budget consists of writing down your income and matching it up against your expenses. If you’re living below your means, you should have money left over going to your savings. You could write it on a napkin, and it would look something like this:

Income (minus) expenses (minus) savings = Net Cash Flow ($0 in a balanced budget)

The issue with this process is it can be completely made up. You tend to under or overestimate many items when describing our spending from memory or feeling. You also have no way to consider life’s consistent inconsistencies: a bonus, an inheritance, an unexpected medical expense, or any other one-off event that seem to happen often. You also have no way of determining how these events or the budget will affect you short or long term. Simply put, a static plan without tracking results will never succeed. Instead, a budget should reflect your past spending habits and provide you with actionable steps for future life events.

Old Fashion Spreadsheet: There are about a million online applications you can use to connect your accounts and have all your transactions automatically import and semi-categorized (Mint, Simplifi, YouNeedABudget, etc). Let me tell you why I prefer a spreadsheet:

  1. Security: You must connect your accounts to these portals. Who knows what they do with your data? In fact, that’s why many of them are free or near free. They sell your data on the back end. Or they will bombard you with advertisements.
  2. Customization: Using a spreadsheet offers nearly unlimited customization.
  3. Categorizing Twice: Your transactions never come through clean in these apps. You STILL need to go through and make sure your transactions are categorized correctly.
  4. Broken Connections: You need to ensure your accounts STAY connected. Often times your bank or outside financial institution will changes their login rules, which in turn makes you re-login your credentials. 
  5. No shortcuts: Jerry Seinfeld, the famous comedian, is quoted as saying “If you’re efficient, you’re doing it the wrong way. The right way is the hard way.” Cash flow planning is the centerpiece and foundation of successful planning. I love automation as much as the next person, but there are some items in our lives that should take time. While the spreadsheet way does take more time, it will make you more aware of your cash position and spending.

KISS: ‘Keep It Simple, stupid!’ as the saying goes. I might be committing financial planning heresy but tracking all individual transactions can be a complete waste of time. Notice the “EVERYTHING ELSE” category. That category includes, well…. Everything else not specified: groceries, restaurants, travel, pet, cell phone, etc. You are more than welcome to track these items and create new line items similar to the car payments and rent/mortgage items in the above example. In fact, if you feel you’re overspending in a particular area in your life, create a new row in the ‘expense’ section and track away. Individuals who have manually tracked their spending in areas they feel they’re overspending in dramatically curve their spending in said area. Why? When you go back and look through your spending on your bank or credit card statements, you tend to become more cognizant of your spending which helps you think a little more before you act. For example, the most frequent area of overspending (or at least the area clients want to cut back most) is food/groceries/restaurants. When you begin tracking your spending in this specific area, you might feel more obligated to cook at home more rather than order take out.

Our Why: The whole point of this exercise is to:

  1. Track your spending to help you better understand where your money is going every month,
  2. Help you better understand how your income relates to your spending,
  3. Help you be better prepared for unplanned expenses,
  4. Give you a short-term cash horizon.

Example Scenarios: Here are some common scenarios that this system helps resolve:

  • Looking to buy a new car? Add a new row and price in the payments.
  • Want to save more in your 401k? See how the increase in contributions will affect your net paycheck.
  • Tax payment upcoming? Plan for an upcoming quarterly payment to the IRS.
  • Feel like you’re not saving enough? Go through your spending and see where we can cut back.
  • Do you want that promotion? Mapping out a 30% bump in income can sure be motivation!
  • Are you unemployed? Update this to see how long you can last until you need to dip into your IRA/401k/other accounts.
  • Needing cash to pay for stock options or to buy in as partner? Work out a savings plan for the cash.
  • Paying off student loans? Map out a plan to tackle the debt payments.
  • Are you in a job that is mostly commission? This is a fantastic tool to track uneven income streams.
  • Self-employed? Inconsistent income and expenses can be tough. Map out a plan!
  • Nearing retirement? Use your spending data to see if your savings is sufficient to cover your current lifestyle.
  • Getting Married or just sharing finances? Use this as an opportunity to compare spending habits and to begin discussing money with your significant other.

Note: I want to take a minute to acknowledge that this process doesn’t factor in certain items such as savings through automatic payroll deductions (such as a 401k or HSA) or pretax health insurance payments. We are only factoring in net paycheck totals that go into our checking accounts. Why? Simplicity. You can absolutely set up line items for federal taxes, state taxes, FICA taxes, various employee deductions, etc. My example version keeps the process nice and simple while still being able to exam the scenarios listed above.

Conclusion and Implementation: Putting together your initial spreadsheet can be done through popular tools such as Google Sheets or Microsoft Excel. You don’t have to be a spreadsheet wizard to figure out how to input data into the cells. I might be biased saying that given my experience though!

I hope you found this helpful and if you’re looking for help getting setup, reach out to us today!

As always, remember to consult with your tax, legal, and investment professionals.

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Jeff Branson, MBA, CFP® – Jeff is the founder of Branson Financial Planning. He spends his time acting as a personal CFO to households across the United States. He believes that financial advice should be clear, objective, and delivered in a fiduciary manner. When he’s not working, Jeff spends his time exploring beautiful Maine with his girlfriend Bianca and his golden retriever Mavrick.