My 1st Million At 33 – yes, you can do it too

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  • Effective Budgeting: Building A Budget (Part 2 of 3)

    Posted by BinaryDollar on October 27th, 2006

    Why did budgeting fail me?

    1. It was too hard to manage. I tried using MS Money and other complex methods to get my finances in order. I kept a budget for 2 days before quitting. It took too long to manage everything. When I bought a can of beans from the store, I would have to input the following information:

    • Did you pay with credit, debit, cash, or check? Credit.
    • Which card? Amex.
    • What date did you buy it? Um. Yesterday.
    • What catagory did this purchase fall under? Food.
    • What sub-catagory did this purchase fall under? Eating out? Groceries? Yeah. The last one.
    • What was the sales tax? ARG. Food doesn’t have any.
    • Where did you buy it from? Who cares?
    • How many did you buy? A MILLION. LEAVE ME ALONE!

    2. It was too inaccurate. There was always some emergency and I would end up going over what I expected. Way over. This was discouraging enough for me to throw most of my budgets away. What’s the point of having a budget if I’m just going to spend more than I thought anyway?

    I needed to find something easier. I wanted to do the least work possible. Here are some of my main guidelines that have allowed me to keep a budget for the past 3 months.

    Binary Dollar’s Budgeting Guidelines:

    Do NOT budget more than you earn. This includes your income, rent from tenants, a conservative estimate of earned interest, etc. The ideal pool you should start with is 90% of your take-home pay for a little bit of added cushion.

    Subtract your fixed expenses first. Pretend that you pay your utilties, rent, and savings at the beginning of the month. Even though the food bill changes each month, I subtract a rough estimate as a fixed expense. I don’t want to run out of money and go hungry. Your savings should be a fixed expense too. Don’t fall into the trap of saving what’s “left over” at the end of the month. There won’t be anything.

    Things that I usually subtract from a month’s pay:

    • rent – $500
    • utilities (rough estimate) – $100
    • food (rough estimate) – $130 (Are you calling me fat?)
    • savings (this could be emergency funds, ira, etc) – $500
    • car (rough estimate) – $40.00

    Strip the catagories. Figure out what’s important for you to keep track of. You don’t need 75789347598374 catagories in your budget.

    I’m not worried on a day to day basis about how much of my savings goes into an IRA, money market, or some mutual fund. I lump it into a catagory called “savings” on my budget sheet.
    Use the bare essentials according to your tolerance of complexity and your priorities. I have fairly broad catagories. Here’s my list:

    • rent
    • student loans
    • gym
    • utilities
    • car
    • groceries
    • savings
    • spending

    Evolve your budget. I used to write my budget and then try to spend according to it. I had it backwards. I had to spend and THEN write my budget. My budget did not become accurate until I started tracking my spending. My budget changed quite a bit in the beginning. It took me 3 months of tracking my spending to evolve my budget. What I thought I spent and what I actually spent were different. Don’t keep your budget the same month after month if it isn’t working. Tracking strategies will be covered in the next article.

    Henry, who contributes to the blog Binary Dollar, is a developing writer interested in technology and fundamental personal finance. He also drank a gallon of milk in 1 hour when he was in college.

    More related posts:
  • Effective Budgeting: Tracking A Budget (Part 3 of 3)
  • Effective Budgeting: Why Budget? (Part 1 of 3)

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    11 Responses to “Effective Budgeting: Building A Budget (Part 2 of 3)”

    1. sanjay Says:

      I think a petty cash book does work quite effectively. As you said, budget out the fixed monthly expenses and track unexpected purchases and expenses.

      Respect every dollar, Mr. Foreman reiterated, respect every dollar.

      “You can become complacent,” he says. “You can say, ‘I’m successful,’ which is the kiss of death. In America it’s hard to wake up hungry. It’s frightening. You can become complacent and wake up tomorrow totally homeless.”

      Fortune’s Fools: Why the Rich Go Broke- Nytimes sep 17-06

    2. NLG Says:

      I think Quicken does a pretty good job of tracking spending now-adays. It automatically downloads all of your transactions (bank, credit card, etc.), and then automatically assigns them to the correct categories based on the description (e.g. Shell for gas). This saves a lot of time.

      Quicken can also track your investment portfolio by downloading stock and mutual fund quotes.

      The only part I don’t have control of right now is my cash spending… I don’t currently have the tenacity to write down everything I spend cash on …

    3. Baddriver Says:

      I am going to piggyback on what NLG said and agree completely. I also use Quicken (2006) and find it very easy because of the download function. I just click update and it downloads the latest transactions from my 401k, IRA, credit cards, etc. Since my bank (HSBC) is not set up for the new version of quicken I have to log into my banks site and download the data from there with a few clicks, but it still beats the pants off entering each transaction manually. I usually enter my cash transactions that day or the next when I get home while they are still fresh in my memory. Besides that I only spend about 15-20 mins one day a week managing my finances with the auto download and categorization features.

      With respect to budgeting I have been very successful in the past year without any hard and fast limits on spending by category. I have taken an approach of minimizing each of my expenses as much as possible without depriving myself. When I consider each transaction daily as it occurs I end up spending less than a budget because there is no set amount to spend up to. If I budget $300 for food I will spend $300 even if I could spend less. With my method I save the “left over” at the end of the month which is usually about a third of my take home pay. I’ll concede that this is a hardcore approach for the more seasoned saver and probably not a sustainable approach for one not accustomed to budgeting and saving.

    4. Todd Says:

      I use Excel for my budget. For expenses, I list them by bill. So for spending things, I have $2,500 credit card, $300 ATM, and $200 for checks, donations, ect… Obviously, my discretionary spending limits are vague. I make day-to-day decisions on what I may need to cut back on. I guess I don’t have to be exact because I have never let myself live paycheck by paycheck, so this vauge way of easily doing a budget may not work for people.

    5. NLG Says:

      Doing things vaguely is a good way to make sure you don’t overspend beyond your income, but it doesn’t give you much control. One of the key benefits of doing a detailed budget is that you might see some areas where you would like to trim spending (coffee, golfing, drinking, dining out, etc.). Without details, you won’t know where you can cut back.

      If you’re happy with your savings and spending, however, you probably don’t feel the need to do this sort of thing. However, if you want to tweak your savings, and reach a savings goal faster… a detailed budget can be a great help.

    6. BinaryDollar Says:

      Man if I could discipline myself to be more detailed I definitely would. Ideally, I would track every single cent including the penny I dropped between the couch cushions.

      I would like to try Quicken though. I probably will once my finances get more complex. Right now, I’m single, no mortgage, no car payments, and a handful of investing accounts. The budget tracking and compliance is a very easy process for me in Excel BUT calculating net worth takes up some time. Quicken would definitely help with that.

      I’m coming out of college so I’m used to living broke. My savings rate is just above the 50% mark for the past 3 months. Definitely not sustainable but I’ll see how long I can keep the streak going.

    7. Frugal Says:

      Thanks to everyone’s comments. I really appreciate your inputs.

      Since the article was written by BinaryDollar who is the guest writer, I am not in the position to reply all of your comments.

      I just want to pitch in on how I do budget (if I do it at all). I don’t spend a lot of time tracking my daily or even monthly expenses. If you have not done it at all, you definitely should track your expenses for a period of time, like 3 months. The exercise of budgetting and tracking expenses is to know exactly you know where your money goes. After that, if you are a disciplined spender, there is not a big need to constantly track it in my opinion. But if you have a slight tendency to over-spend, you should definitely track your expenses closely and stick to your budget, enforcing the discipline upon yourself.

      Just my two cents.

    8. Lee Says:

      Folks…you do not need to micromanage your finances in order to control your money. Most of the problem with managing money is the cashflow part. The same amount never seems to come in, and at the same time, and it never goes out in the same amounts or the same time…and months never contain a nice neat 4 weeks (28 days), so all this makes for a lot of fluctuating chaos. Eliminating this chaos elimates 95% of everyones money management efforts…it’s not rocket science.

      I solved this problem close to 20 years ago and recently posted this online as I was so tired of people complaining about how hard money management was. So here you go

      The “tracking all my expenses”

    9. Frugal Says:


      I kind of agree that you don’t need to micro-manage your money. But to say you solve this problem is a little arrogant I think. Budgeting is always a personal issue, and everyone would have different personal problems. I don’t think there exists a one-size-fits-all solution.


    10. Lee Says:


      Sorry, did not mean to offend you. I would agree it’s a personal issue. I reread your earlier post of trying to budget doing the least amount of work. What can I say except the system I describe (the b word) accomplishes your objective…unless you want to make budgeting a hobby or a second career, which some people do. Then it’s not for you. If you want to get on with your life and spend your valuable time doing other things (like making money), well, here you go. No hard feelings. Like I say on the website; if you can find something better/faster than what I’ve done, please let me know what it is so i can use it!!! Then I would be even more satisfied than I am now. Good luck to you.



    11. Frugal Says:

      No problem.