The Best Budgeting System: Automated Expense Tracking

There are many reasons why people start a budget. Some are trying to pay off their debt. Others want to simply reduce spending and save up for a large expense such as a house or a new car. Whatever the reason, I believe that in the end, budgeting always improves your personal finances and net worth. And I think that is true even if you don’t necessarily follow the budget plan to the point.

I am of the opinion that everyone should use some sort of a budgeting system, but I don’t believe in spending much time doing actual budgeting. For me personally the best budgeting system is my own, which focuses on automation through technology. I’m going to call it the Automated Expense Tracking system. Using it requires less than ten minutes per month and has worked really well for me for several years.

Using a budget is beneficial to your overall personal finance for a number of reasons. Budgeting can help increase your net worth significantly.
Using a budget is beneficial to your overall personal finance for a number of reasons

My story on starting a budget

My first budget was a spreadsheet, with four categories. I had allocated a percentage of my monthly income to each one as follows:

  • Fixed costs – monthly bills such as rent, utilities, phone, internet, groceries (~50%)
  • Investments – 401k, Roth IRA, Stocks (~15%)
  • Savings – house down payment, car, vacation (~15%)
  • Wants – restaurants, movies, clothes (~20%)

Using an Excel spreadsheet as a budget planner, however, was not very useful for one major reason – it took a lot of time to track all expenses. Surely, a single fellow in his late 20’s living in New York City, like myself at the time, was not going to be spending a significant amount of his free time in front of a spreadsheet looking at expenses.

So I simply entered all my fixed costs into the spreadsheet and figured out I was within the allocated 50% in that category. Then I checked the other categories and after some quick math I decided I was spending within the limits of my budget. Great! Mission accomplished! Of course, I never opened that spreadsheet again.

Finding the budgeting system that works for me

That exercise was not a complete waste, though. Some months later I was reading up on personal finance again when I was reminded of Mint.com. At that point I had already had a Mint account for a few years. However, I hadn’t linked all my bank accounts, credit cards, or investment accounts to it yet.

My personal finances were in decent shape, mostly thanks to my frugal lifestyle. I didn’t have debt. In order to get the whole picture of my personal finances I decided to add all my accounts to Mint.

Around that time was when I found out that I could create a budget inside Mint. I realized that since I had all my credit card transactions automatically categorized for me, I could easily monitor my spending and see if I really fit within that budget from the spreadsheet I had abandoned previously.

I was already using credit cards for everything anyway, and now there was another big advantage to doing that. In addition to credit cards being more practical than looking for an ATM or keeping a lot of cash on me, it also helped me track my spending. All my expenses fell neatly into a category in my budget automatically. I was also getting cash back, member rewards points, and I was improving my credit score just by using all my credit cards regularly (and obviously paying them off right away).

Smooth sailing (“budgeting”)

From that point forward I had to log into Mint just once a month to go through my credit card transactions. Occasionally I’d have to manually add a cash purchase such as a five dollar street food lunch I’d bought. As I verified the transactions had the correct category, I would take a quick peek at the monthly budget to make sure cash flow was what I expected it to be.

To this day, this is still how I do my “budgeting”. I’ve only had to update my budget plan a few times over the last several years. Mostly the adjustments have been due to fixed costs changes such as rent increases or when I finally managed to cancel my gym membership.

Budget notifications and spending trends

In addition to the automatic categorization, my lazy Automated Expense Tracking system (a.k.a. Mint) also notifies me automatically if I have exceeded spending in any of the budget categories. I can also take a quick look at my spending trends. Mint makes it possible for me to easily identify what I’m spending most on and monitor my net income and net worth over time.

My spending by category for the last four years from Mint's trends tool, helping me identify what I spent most of my money on.
My spending by category for the last four years from Mint’s trends tool

One thing I love seeing is that spending over time has not increased significantly in the last ten years, while my income definitely has. If you’ve read any of my previous blog posts this is probably not a surprise. As I’ve mentioned before, I have lived a frugal life well below my means for a while.

Chart showing my income vs spending over the last ten years from Mint's trends tool, which helps me visualize if I'm spending more than I'm earning.
Chart showing my income vs spending over the last ten years from Mint’s trends tool

The best budgeting system is the one you’ll use

In the end, the best budgeting system is the one you won’t mind using regularly. Some people prefer using budget envelopes or the 50/30/20 budget. Others come up with their own custom budget or spending plan. Some prefer budgeting with a pen and paper, while others choose to use software such as Excel spreadsheets, YNAB, Mint, and Personal capital. It’s your choice. What’s important is to just pick one you’ll actually use.

And if you are still unsure whether you really need a budget, I’d like to reiterate that it will only help you! According to the creators of YNAB (You Need a Budget) “On average, new budgeters save $600 in their first two months and more than $6,000 their first year.” If you ask me, that’s nothing to sneeze at.

A word on technology vs pen and paper or envelopes

Technology saves us a lot of time and effort by automating the mundane tasks and drawing that pig picture for us. I personally don’t find the cash envelope system very practical these days. So much spending is happening online, and with the COVID-19 pandemic contactless payments have become much more common, and even preferred.

Budgeting wisdom and lessons learned

Through my experience I’ve realized that the goal of budgeting is not to restrict yourself on how much you spend but rather to understand where your money goes. Automatic tracking and categorization of your purchases goes a long way to help you narrow down what you spend most of your hard earned money on.

Oftentimes you realize you are spending more than you are earning, which is a common problem for many people. Having all your spending tracking in one place, though, lets you see the big picture more easily and allows you to dig deeper to find where you are spending more than you should.

You can set spending goals instead of spending limits. It’s really ok to sometimes go over the goals and other times be under. At the end of the day, what matters most is that you are comfortable with what you spend in each category.

You may have to update the budget to adjust for changes in your life, as you get married, have a mortgage, make car payments, approach retirement, and so on. For me, a free tool like Mint which automates all the expense tracking and categorization is a big reason for my steadily increasing net worth.

— Finance Squirrel

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