We've all struggled with personal budgets that don't work. I tried and failed with many different templates and methods.
Several years ago I was working for a radiology company as a financial analyst, and I was tasked with building the corporate budget for the following year. I had been through budget cycles before and knew what I was doing.
I set up a meeting with my boss to go over our assumptions for the following year, and to make sure I was including calculations for any operational changes we were planning to make. Also, to work in additions to the budget for new sites or modalities (product lines).
After the meeting, I had clear guidance on how to proceed. I would create a budget for each clinic and then reach out to the clinic directors to review and provide additional insight. I would use global assumptions like estimated growth rates, changes in rental rates, new maintenance contracts, and adjust for any projected changes in insurance reimbursement rates (clinic revenue).
At the time of budget season in the fall of 2013, I had struggled with my personal budget. But during the company's budget process, I realized a couple of reasons that it wasn't working for me, and started fresh and new with a simple Excel spreadsheet.
I created a personal budget in Excel and it worked so well, I kept it in the same format for the last seven years. I will admit to lapses here and there, but for the most part, I've used one ongoing budget all these years and it helped me pay off my debt, save money, buy a house, and has helped me navigate the road to financial freedom.
These are the 5 hacks I implemented in my personal budget that finally made it work:
Keep It Simple, Stupid (KISS)
There are several ways personal budgets can be too complicated and cumbersome. Reducing these pain points will make it more likely for you to keep your budget updated.
One of the major mistakes I made early on with my budget is creating too many budget categories to track. Doing this makes it more cumbersome to update your actual results each time. If you use fewer categories, the process is much quicker.
I recommend using broad categories for most expenses. If you're struggling with a particular type of spending habit, you can isolate it by giving it a more detailed category on your budget. This will help you manage it. But don't fall into the trap of making a detailed category for everything.
Here is a list of recommended budget categories:
- Housing (includes mortgage payment, home insurance, property taxes, HOA fees, etc.)
- Utilities (power, water, garbage, gas, telephone, internet/cable)
- Repairs & Maintenance (repairs to home, home decor, furniture, appliances, lawn care, plumbing, lighting, gutter cleaning, power washing, etc.)
- Transportation (car payment, Uber/Lyft, bus tickets, fuel costs, car repairs, etc.)
- Child Care (daycare, after school care)
- Medical & Dental (co-pays and deductibles, medications, dental & vision costs, etc.)
- Meals (groceries, restaurant expenses, fast food, school meal plan)
- Personal Care (hair, clothing, shoes, personal care supplies, dry cleaning, nails, etc.)
- Vacation & Travel (airline tickets, transportation & meals out of town, hotels, any other costs while on vacation)
- Entertainment (streaming services, theater tickets, sports tickets, museums, zoos, and other family outings)
- Business (if you're working on a side hustle, plug in your expenses here)
- Gifts (Christmas presents, birthday presents, and other gifts)
- Other Discretionary (a catch-all for expenses that don't fall into the other categories)
- Credit Card, Student Loan, or Other Debt Payments
In accounting, there's a principal that states an accounting standard can be ignored if the effect of doing so has such a small impact on the financial statements that a user of the statements would not be misled. This is true for budgets as well.
If it doesn't impact or change a decision that you would make regarding your savings plan, it probably doesn't need to be tracked.
If you are off a few bucks and can't find the transaction to reconcile it, just plug it. Avoid spending hours searching for pennies, as its just not worth the time and effort. Focus on the tasks and items that make an impact.
To keep your budget process as streamlined as possible, I recommend ignoring all of the taxes, 401k funding, medical insurance, HSA, and other deductions from your paycheck. Instead, record your net pay as your income. Record only expenses you pay directly. This will make your budget process easier.
When you're tracking your net worth, however, you definitely want to include your 401k account balances and HSA account balances in your calculations.
As a financial analyst, I've learned over time that the more simple format you use to present information, the more useful it is. Don't go crazy with a huge complicated workbook that's difficult to interpret. Sock puppets and crayons, my friends.
Because after you update your actual results and look at your performance, you want a simple, clear conclusion on where you overspent and underspent, giving you the ability to strategize and improve.
Budget for Every Payday
This is my biggest budget secret. For seven years, I've budgeted not monthly, but for every pay day. Most of us don't get paid monthly. For those who do, lucky you! Keep budgeting monthly.
Budget for every payday because you need clear direction on exactly what you're doing with every dollar of every paycheck.
Furthermore, its the key to using the Savings Waterfall System accurately. If you budget for every payday, you'll know how to distribute your funds based on recurring bills, discretionary spending, and savings.
Why don't monthly budgets work?
Let's say you are paid bi-weekly on Fridays, meaning every other Friday. Its Friday the 17th and you just got paid.
Do you know which bills you've paid this month? Or what's due before your next paycheck? Do you know if you'll receive your next paycheck before or after the end of the month when you need to pay rent or mortgage?
If you don't have a very organized method of keeping track of all that stuff, then you're not going to have a clear understanding of how to apply funds to your budget properly.
I may just be a disorganized person, but when you're living paycheck-to-paycheck like I was for many years, with no credit to fall back on if I miscalculated, I needed to know where every dollar was going.
I don't live paycheck-to-paycheck anymore, and I have emergency funds if I run into trouble, but I still like budgeting for every single paycheck, and I believe its the key to making personal budgets work long-term.
Establish a Budget Baseline
In a corporate setting, we use the current year's profit and loss statement as a baseline for the budget. For timing, there are a couple of methods – one uses trailing 12 months, and another uses annualized calculations with the current year's data.
When budgeting for personal finances, you probably don't have your own profit and loss statement to use. To establish a baseline, you'll download transaction history from every bank account and credit card you've used for the last 3 or 6 months. I recommend using the last 3 months because 6 months of data is not always available.
Read this post on analyzing spending habits using Excel pivot tables.
Once you start budgeting, if you stick with it, you'll already have a baseline that you will tweak in future periods.
Track Your Results
Just having a personal budget won't help you much if you don't follow it. You won't know if you followed it if you don't track your results.
That's why you will continually analyze your spending habits. Every time you spend money, you'll log that into your budget to actual comparison. You can do this daily, weekly, or at a minimum, every time you get paid.
Its important to stay in tune with your goals and track your progress. The only way to do that is to spend quality time with your income and expenses on a regular basis. This does two things: it keeps you up to date on your progress, and keeps you jazzed about achieving your dreams.
If you lose focus, other priorities will pop up and distract you from achieving your dreams.
Stay focused! Update your results every payday.
Don't get discouraged when you don't meet your budget numbers. Just figure out why, and how to improve during the next cycle. If you always miss your budget, you may need to tweak your budget numbers to something more realistic.
Each pay period when you compare your budget to actual results, make a list of the THREE top reasons you missed your budget, the THREE top reasons you nailed your budget, or a combination of hits and misses. This is the “analysis” part of Financial Planning & Analysis.
Congratulations, you are now an FP&A guru.
The budget is the financial plan, and interpreting your actual results is the analysis. Its basically the same exercise I go through every month for my company as part of my day job:
We look at each business line's profit and loss, and compare it to budget and prior year. I give commentary on what we did well on, “hits”, and what we need to improve on “misses”. I provide this in the form of actionable information that operations, billing, or other departments can use to manage better.
Don't be so hard on yourself! Celebrate your wins.
Its important to pat yourself on the back for improvements you've made over time. For areas that you didn't miss on. These little hits will motivate you to do even better in the next cycle.
Projecting the Future
Many budgets that I've seen only cover one year of income and expenses. But we have big dreams, and its going to take more than a year to achieve them. So we need a plan that extends past one year.
Likewise, most businesses have five, ten, or even twenty year projection targets. Granted, these are prepared at a high level – meaning there's not much detail behind them. But they are projected based on an estimated growth rate.
The point of projections isn't to predict the future. Its to decide the future. If you don't have a long-term plan, you don't really know what you're doing beyond this year.
Once you build your simple personal budget in excel by pay period, it will be easy to add additional years. To make it fun and motivating, I like to add growth rates to my income. Even if its just income from a paycheck.
I don't think there's been a year when I didn't a pay raise of some kind. And in the last 5 years, a bonus is pretty much a sure thing. The amount of the bonus, however, is not. So I stay conservative with my estimates.
Motivate yourself to achieve higher pay at work by using a growth rate each year for your income. I recommend a rate of 5% – that's the rate I use and I've beaten it every year. Read how I tripled my salary in 5 years.
Currently, my personal budget at home has projections through 2023. Normally I would trend it out farther, but I have some big milestones coming up in 2023 and I'm not sure how to budget past that quite yet (major awesome lifestyle changes incoming).
I recommend 3 to 5 years. Don't be afraid to work in some growth projections for income.
You can also trend out your net worth based on savings, debt payments, mortgage amortization, and other factors, but that's a whole lot of fun for a future blog post.
In summary, here are the 5 hacks that will make your personal budget work:
- KISS or Keep It Simple Stupid
- Budget for Every Payday – try it, it'll change your world
- Create a Baseline – where are you coming from?
- Track Your Progress – where are you now?
- Project the Future (3 – 5 years) – where are you going?
I hope these tips will help you create a personal budget that works for you!