A few months back, I wrote a post on the experience my wife and I have had over the last year in implementing a budget. The experience has been largely positive, and several clients have asked me for some pointers on beginning the budgeting process. Here are some suggestions:

Implementing a Budget

Collect the data, then budget – Spend a few months collecting information on your spending, and then use the data collected to establish the budget. Furthermore, unless it’s necessary – because you are under-saving or over-spending versus your plan – don’t feel that you need to immediately curtail your spending. Changing your spending habits on top of trying to implement a budget make it more likely that you’ll ultimately do neither.

Establish short-term reserves – Reserves have been key to the success of our budgeting, and we have set them up for spending categories that are intermittent but involve significant amounts. We have reserves for predictable events like birthdays and Christmas, and we also have reserves for unpredictable things like car repair, home maintenance and vet care for our 17-year-old cat. The reserves for predictable things are invariably drawn down at some point during the year, while the reserves for unpredictable spending will hopefully grow until they hit a specified level. Once they reach that level, these reserves will only be funded when they drop below the specified level.

Be flexible in reallocating non-reserve funds – You will invariably find that from time-to-time, you’ll spend more than anticipated in a specific category. We had family and friends stay with us for two weekends in a row recently, and we were over-budget on eating out.  Fortunately, we were able to reallocate funds from groceries and a few other categories and remain within our overall budget for the month. You might be tempted to reallocate from reserve funding to cover non-reserve spending, but I would avoid that if possible. I did that a few times when we first began budgeting only to find that when I needed the reserves a few months down the line (thanks to hurricane damage), the reserve fund was short of what was needed.

Couples should have personal spending categories –  If you want to maintain domestic harmony as you implement a budget, make sure to fund personal spending. More specifically, each of you should have a line item in the budget funded to an agreed-upon amount that you can use to spend on whatever you’d like, no questions asked. Furthermore, any amount that is unused rolls over to the next month, so you each benefit from your specific approach to spending.

Stay on top of the books – The software we use can import transactions and try to classify them, but we prefer to enter things manually for two reasons. First, we’re cognizant of spending in each category, and second, manual entry reduces classification errors. We try to enter transactions – typically using our IPhones – as they occur, but if we can’t enter the transaction at the time, we save receipts and enter them at home. I also reconcile transactions and accounts once a week. When we initially began implementing a budget, I tried to balance the books once a month, but that took a good deal longer given the number of transactions. Now, the total time we spend entering transactions and keeping books up to date is about 30 minutes a week.

By following the steps above, we’re able to consistently remain within budget without feeling that we’re too constrained or spending an inordinate amount of time on our finances. If you are a client and are trying to implement You Need a Budget or some other budgeting software and have questions, please let us know.