First Jeff Yeager in his latest book “The Cheapskate Next Door”, then financial journalist Liz Weston. Now it’s my turn to come out of the closet, so to speak, as a financial professional who doesn’t keep a “budget”, at least not in the traditional way. Don’t get me wrong! As many of my clients can attest to, I don’t dispute for a minute the value of tracking expenses. In fact, I am convinced that thoughtful spending is the single most powerful tool in everyone’s financial planning toolkit.
Nevertheless, whether you call it the “B” word, a spending plan, cash flow management, or [insert euphemism here], I tend to agree with many of my clients who wrinkle their noses in horror and recoil at the prospect of keeping track of expenses at a detailed level. The very idea of spending that much time staring at little numbers – perhaps some red – is off-putting enough to many that it simply doesn’t get done, no matter how big the potential reward.
And therein lies the problem, as well as the solution. As a wise woman once said: “There is no singular, correct way to organize anything, whether it’s your stuff, your space, or your time”… or in this case, your living expenses. OK, so the “wise woman” is my friend Sue West, a Certified Organizer Coach®, and her point was that, no matter what you’re trying to organize, you don’t need someone else’s idea of the perfect system. Rather, you need a system that works for you. Otherwise, you’re not likely to maintain it, you won’t end up with any more useful information than you had before, and all the bells and whistles it features will be wasted.
By Sue’s account, there are 3 key elements to designing a system that works for you: people, process, and product. When it comes to tracking expenses, these include:
Whatever your situation, there’s a system that’s right for you, and the factors described combine to point you to just the right combination of process and product. I’ve seen people who do an incredible job of making the most of their money writing down expenses daily using a pencil and graph paper, calculator optional. At the other end of the spectrum, the more mobile and tech-savvy among us may need a fully automated, portable solution, such as Mint.com & its handheld app.
As for me, with all the time I already spend at the computer analyzing little numbers in tables, I’ve opted for the simplest, least time-consuming path, something I call “reverse budgeting”. Basically, this involves making a decision once a year, after reviewing last year’s spending, about target spending for the year ahead. After checking savings levels vs. funding status of goals, how much is left over to spend on, well, living per month? Once a month, this amount gets transferred to an account whose sole purpose is to cover living expenses. If that account dips below its predefined acceptable level, that’s a red flag that something’s not going according to plan. Could be overspending, could be under budgeting. Either way, it’s time to dig into the details, figure out what’s going on, and, if necessary, change course while there’s still plenty of time to keep the overall financial plan on track.
And that, not spending hours entering, categorizing, and analyzing data, is really the point of this whole exercise: keeping the gap between what comes in the door and what goes out for living expenses big enough that cherished long term goals don’t fall by the wayside. When you find the system that allows you to do that without cramping your style, you’ll have found your way to “B”.
