Where Does All Your Money Go?

Does the word “budget” make you cringe? For many, the word conjures up images of a ball and chain strapped to their ankle, a heavy weight putting a drag on their finances and fun.

But people who use a budget — or, as I prefer, a cash flow plan — typically find it freeing. It provides peace of mind, guiding their use of money in a way that enables them to live generously, save and invest adequately, and enjoy living with financial margin.

Last month, we looked at the first step for using a budget: planning. Once you have a plan for how much you intend to give, save, invest, and spend oneverything from food to clothing, you need a system to see what’s *really *going on with your cash flow. In this article, we’ll introduce you to three different methods for tracking your cash flow. Which one is best? The one you will actually use!

Write it The first way to track your cash flow is to use a paper and pencil system. Along with the Cash Flow Plan form on the SMI website, you’ll find a Cash Flow Tracker form. Take the goals from your Plan and write them across the top of the Tracker. A budget guides the use of money in a way that enables you to live generously, save adequately, and enjoy financial margin.

Each time you spend money, whether you use cash, write a check, use a debit or credit card, or pay a bill online, write it down in the appropriate column. (The reason there aren’t 30 or 31 rows is that you won’t spend money in every category every day of the month — at least, I hope not!)

Keep your Cash Flow Plan and Tracker forms in a place where you’ll see them, such as your kitchen counter. That way you’ll be reminded to record the day’s spending. After you do, cross off the date at the bottom of the form as a reminder that you captured the day’s spending.

Use one form for each month, totaling up the spending for each category and using last month’s totals to keep track of year-to-date totals.

Stuff it Another way to track your cash flow is to use the envelope system for many of your purchases. Some of your bills will be paid out of your checking account, such as your rent or mortgage, utility bills, and insurance premiums. But for other more day-to-day categories — such as food, clothing, and entertainment — the system calls for putting enough cash for each category’s monthly budgeted amount into a separate, clearly-labeled envelope.

For example, if you get paid once a month, get enough cash for the month’s budgeted amount for groceries and put it in an envelope marked “Groceries.” When you go to the store, take that envelope with you, pay for your groceries with that cash, and put the change back in the envelope. If you get paid twice a month, then on payday take half of the monthly budgeted amount and put it in the envelope.

The envelope system is a literal “hands-on” visual tracking tool. You can readily see how much you have left for a particular category at any point in time. That will help you stay on track.

If you’re new to budgeting, I suggest starting with either the paper-and-pencil system or the envelope system. Use one of these approaches for at least six months and only then consider moving on to an electronic budget tool.

Digitize it There are two types of electronic budget tools — software and online services. They have benefits in common, but also key differences. Quicken is the leading software program for budgeting and Mint.com is arguably the leading online budget tool, but others exist as well.

One of the strongest benefits of using electronic budgeting tools is that they do much of the tracking for you. When linked to your bank and credit card accounts, these tools automatically capture transactions you make by check, credit card, debit card, and online bill-pay systems, as well as online transfers and deposits. The only transactions to enter manually are cash transactions.

Electronic tools can even categorize your transactions if you want them to. For example, if you do most of your food shopping at Bob’s Finer Foods, these budgeting tools can be set up to automatically categorize each such transaction as “Groceries.”

With an electronic tool, you can readily see how you’re doing in any category at any time. It’s great to be able to pull up the status of your clothing budget on your smartphone while in the parking lot of a store before going in to shop.

Worried about sharing your financial information via online connections? The leading electronic budget tools use what’s called bank-level security, which is the same type of security your bank uses when you check your account online. They are also read-only services. Once you are logged in, you can’t use such tools to move money around; you can only see the information you’re interested in. (Of course, if you have concerns about online security, you could go with the paper-and-pencil approach or the envelope system instead.)

Quicken can generate a variety of detailed reports, so if you’re especially analytical, you might want to go that route. Mint is more streamlined. In the Bell household, we’ve been using Mint for many years. I like that it’s free (albeit with ads) and my wife and I can easily access it anywhere we can get on the Internet.

How can you best make use of the information you track? That’ll be our focus next month. Image used with permission