Personal Financial Management with a Budget

• Why should I keep a budget?
  Don't, if you don't want to. But if you're reading this page, and continue reading, clearly you're looking for financial advice, and one of the best I can give is to keep a budget. A budget will enable you to identify a financial problem if it exists, find short-term and long-term solutions to it, and enable you to understand and control your finances better. If these actions don't enable you to sleep better at night, you have other problems.
• Keeping a budget is lame/un-cool. Why should I do it?
  Not having enough money to do what you like is even less cool. Arguing with your spouse over money is even lamer. Going into credit-card debt is risky. Defaulting on payments is dangerous. Borrowing money to pay critical bills, even when there is no emergency or extenuating situation, is just stupid.
• Fine, I'll keep a budget when I have enough money. Why now?
  If you have enough money, you may not need a budget - I doubt Warren Buffet really keeps a personal one. It's precisely when you have less money that you need to manage it better. Besides, after a while, keeping a budget is less about managing money and more about disciplining yourself.
• But won't a budget curtail my style? Make me a penny-pincher?
  Any tool, taken to an extreme, can become counter-productive. However, if your finances are uncontrolled, you need to worry more about using a tool to fix it rather than abusing said tool. If you're shipwrecked and want to build a raft, you need to somehow find a hammer and nails rather than worry about the yet-to-be-used hammer hurting your thumb. I like to think of budget usage as progressive stages:

  1. Resentment: You baulk at having to enter your expenses in the budget - it's like noting down each cheque in a book and tracking your bank balance.
  2. Discovery: As you enter each expense in a disciplined manner, you find out where the money is going every month.
  3. Redressal: You figure out how much you'd like to spend on what each month and try and stick to your budget.
  4. Auto-pilot: You don't worry about expenses. By and large, you stick to your budget, and you always have money to do what you want. Occasionally, you exceed your budget in one category or the other, but you clearly understand why, and you know how to correct for it. You focus on other aspects of your life, not monthly bills.

  Your goal is to reach the Auto-pilot stage, then stop worrying about cashflow. Doing so is hardly "penny-pinching", neither is it a curtailment of your style. If anything, being on Auto-pilot is refreshingly liberating.
• I don't have the discipline to keep track of everything. Can I track just the big expenses?
  No. First, deciding which expense is "big" and which isn't requires too much brain-power - you want money management to be dead simple. Second, introducing subjectivity opens you to the temptation of ignoring a shameful splurge at the mall or the "it's a million-in-one chance" loss at the slots. Third, you'll be surprised (in the Discovery stage) how much "small" expenses, like the daily coffee or tolls or cell-phone overcharges, add up. As for your lack of discipline, that's a real problem, for sure. But the big mountain of fiscal indiscipline can be summitted only by the discipline to take the small steps of entering numbers in a budget. Rest assured, keeping a budget is not a time-drain. Once you're past the Resentment stage, you won't even notice your reflex action in entering each little expense, or income, into your budget.
• Okay, begrudingly or enthusiastically, I am willing to start. Where do I start?
  Start simple. Your basic budget must let you add expenses (and income, as negative expense) in about a dozen categories and see the average for each over several months. Everything else is jazz. I keep my budget in an Excel spreadsheet. Excel has served my purposes well since 1997 for this task. My first budget was simple - I had about a dozen columns, one per category, and each row tracked expenses for a particular month. Over time I have added layers of analysis I was fond of to it. Now, my budget automatically calculates my average spending per month in each category and compares the per-month spending to an expected amount. If I exceed my expected amount, the entry turns red. I see red (ha ha, small pun) when there's red in my budget, so I try to avoid it and/or adjust my spending around it. I also have little bar and pie charts that show pretty much the same information. I track the amount left over at the end of each month and the total of the leftover from several months.

  You're welcome to use a budget based on mine. Just right-click on the link, and save the file on your Windows machine. Modify your copy any which way you like, most importantly, in a way that suits you most. I know Excel fairly well, so I have used some of its more exotic features (computing coefficient of variance, setting dates automatically, configuring charts, conditional text, etc.). If you can figure out my sheet, use what you like. If you can't, simply use mine as a template and create yours afresh. If you hate Excel, use some other spreadsheet. If you dislike spreadsheets, write your own web-based CGI page to do it. If you're not web-savvy, buy Quicken or Money or whatever to help you. If you are computer-phobic (how are you reading this page, pray tell?), bring out the ol' accounting ledger and a trusty pencil. The point is not to gain software proficiency (albeit welcome), but to use a tool that helps you manage your budget.

• Your categories don't make sense at all to me. Can I change them?
  Never! Naah, just kidding. By all means, change whatever. As you work your budget, your categories will evolve - that's good. You'll separate out some categories (how much do I spend on restaurants and how much on coffee alone?) and coalesce others (smush telephone, electricity and gas into utilities). You'll drop categories (I don't have a baby!) and add others (dude, you forgot a category for my dope habit!). You'll change expected amounts. You'll change them again. And again. You'll draw more evocative graphs. You'll separate out cash, cheque and credit card payments. You'll spend less. You'll discipline yourself. You'll consume what you need alone. You'll actually have money left over at the end of the month. You'll argue about other things with your spouse, not money. You'll be able to afford the occasional movie, the frequent charitable donation, the triple tall decaf soy Mocha Valencia at Starbucks, the trip to Bali that seemed out of reach, the rare coin that you cherish. You'll be on your way to financial comfort. Budget for it.