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A Simpler Way To Budget.

Because we are away camping this week, the following is a guest post from Mike over at Four Pillars. If you like what you see here, won’t you consider subscribing to his feed?

One of the more popular concepts with respect to budgeting is the idea that you should write down every single financial transaction. Every withdrawal, every purchase, every loose coin that gets lost in your couch has to be noted, reconciled, balanced, analyzed and accounted for. While this method may help you see exactly where you spend your money, the problem with tracking every financial detail is that it’s a lot of work and unless you are embarking on a major financial makeover, I’m not sure that you get a lot of value out of it. An alternative which is much easier is to just track your cash flow by looking at your cash and debt balances once a month and determining from those numbers how much of your income you are spending. Basically if you are spending more than you make, your total cash and debt balance should be going down. If you are spending less than you make (hopefully) then your cash and debt position should be going up. Using this method will tell you exactly how much you are saving and how much of your income you are spending.

How to do it

The calculation is as follows:
1. Cash saved = net cash position at beginning of month minus net cash position at beginning of previous month.
2. Total spending = total income during the month minus cash saved (from calculation 1)
Note that the net cash position is the net total of all your bank accounts, credit cards, and line of credits.
See the last part of the post for a detailed example.

Who should use this?

This method is perfect for someone who already has their finances under control and just wants to “take the temperature” once in a while to make sure things are going ok. Another type of person who might benefit is someone who needs to make major changes in their spending habits but doesn’t have the motivation to track their spending properly – this method is a lot better than nothing!

Benefits

It’s quick and easy – assuming you don’t have too many accounts and have internet access to get the balances, this method should only take a maximum of one hour per month.
Useful information – this method will tell you exactly how much of your paycheck you spend and how much you save which is great information for financial planning.

Disadvantages

This method doesn’t provide any detail about your spending so if you are spending 18% of your paycheck on newspapers and coffee, then this method won’t help you figure that out. However if you have your spending under control and don’t need to make any major changes then measuring your cash flow might be all you need. You can still look at other information sources such as your credit card statement for more detail.

An example calculation

On April 1, Sue has $1000.00 in her bank account and owes visa $80.00.
On May 1, Sue has $1250.00 in her bank account and owes visa $160.00.
She has a net income of $3500.00 per month.
We’ll calculate for the month of April.
1. Cash saved = net cash position on May 1 minus net cash position on Apr 1
net cash position on Apr 1 is the total of bank accounts and debts = $1000 – $80 = $920
net cash position on May 1 is the total of bank accounts and debts = $1250 – $160 = $1090
so the total cash saved is = $1090 – $920 = $170
2. Spending = net income minus cash saved = $3500 – $170 = $3330.00


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Comments (3)

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  1. Budgetbunny says:

    I have actually used a “combined system” – meaning that i track both my “cash in the beginning” and “cash in the end” plus in addition to that i have major spending groups. It is kind of cash-flow type of planning combined with minor budgeting that does not give me too much grief of tracking every single checks.

    And i can also still track all the important ratios like – what % goes on car, what on housing, and how much i put aside for investments.

    The excel table i have i use also for budgeting in the sence that i have a “predicted” numbers allready filled out for the year, which means i can see also how i do against that and my targets and is my cash-flow positive or negative.

    In addition to that i have sepparate sheet for investments, cash balance and my targets i want to achive (ie. by the end of 2008 have emergency fund of XXXX)

    For example my excel column is something like this:

    —-
    CASH IN THE BEGINING

    Net salary
    Bonuses
    Misc income
    TOTAL IN

    COSTS
    Misc living (eating, entertainment, clothing)
    Mortage
    Utilities and home
    Car
    Credit card due

    Payment to investment account
    TOTAL COSTS / OUT

    CASH IN THE END
    CASH CHANGE (+ / -)

  2. Four Pillars says:

    Bunny, that sounds good.

    I also use our credit card statements (we charge EVERYTHING) to help with figuring out the bigger expenses which sounds similar to what you do.

    Mike

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