You probably weren’t expecting to hear Frugal Dad advocating getting rid of a budget. Well, I’m not, entirely. What I am advocating is that you take a look at your monthly budget with a critical eye to determine if your budgeting process is negatively effecting your life.

Yes, budgets can set you up to succeed, or set you up to fail. Make them too strict, and you’ll never stay within a spending category’s limits. Have too many budget categories, and you’ll spend too much life energy hunting and recording receipts. Like everything in life, try to find some balance when setting up your budget, but err on the side of simplicity. Here are a few reasons why.

1. Strict budgets are as successful as strict diets, they aren’t. Ever tried to lose weight by drastically cutting calories or eliminating all foods you enjoy from your diet? Let me guess – you lost weight the first two weeks, had a slice of cake at a party, and derailed your entire progress.

Humans just don’t like big changes. We are more successful over a longer period of time when we implement small changes that continue to put us on the path towards reaching a larger goal. Like the old saying goes, you have to eat an elephant in small bites. But hold the butter, or you’ll have to go right back on that diet!

2. Strict budgets create money micro-managers. A couple years ago we took the kids to the Smoky Mountains, their first trip to see a hill over 300 feet high. My wife and I were enjoying the vistas along the Blue Ridge Parkway, but noticed our kids had their heads buried in a book, or their Nintendo DS, and were missing the scenic views. I spent a great deal of the time reminding the kids to look up at the overlooks. Sometimes they did, most times they didn’t.

That’s how adults who are consumed by managing their money appear. Our heads are buried in spreadsheets, or Quicken, and we forget to stop and look up at the overlooks. Pretty soon, we were off the Parkway and realize we missed an opportunity to see the sights; to stop and smell the roses.

3. Budgeting is boring. I confess; I just don’t like budgeting. I don’t like creating them or updating them. I realize they are necessary for proper money management, so I create one each month. However, I make it as simple and painless as possible. I haven’t always been this way.

When I was younger I had dozens of budget categories. Instead of a simple “Food” category, I had a category for meals out, snacks from the vending machine, groceries, etc. I meticulously tracked debit card (and at the time, credit card) purchases, and receipts to be sure I put the expenditure in the correct category. Oddly enough, this was also the time when I accumulated the most debt. In my attempt to be sophisticated, I failed to recognize and adhere to one of the simplest personal finance principles around: spend less than you earn.

4. Strict budgets limit opportunities. By opportunities, I mean opportunities to experience something or save money by buying something at a deep discount. How many times have you passed on something you’d really like to do, or really like to own, because it “wasn’t in the budget.”

It is almost as if the budget is controlling us, rather than the other way around. Then again, for the most impulsive shopper, that’s probably how it should be. But for those who have displayed discipline with their finances, a strict budget feels more like a tight-fitting jacket than a useful tool. It restricts us, and keeps us boxed in from the chance to live a little.

5. Budgets cause money fights in relationships. I saved the best for last. My wife and I don’t see eye to eye on the concept of budgeting. She is the free spender, and I’m the nerd, at least when it comes to finances (though she would probably say the nerd label extends further!). Early in our relationship I tried to force my elaborate budget system on her. It didn’t work. For a period we scrapped the idea of budgeting altogether.

These days, we have compromised and met in the middle when it comes to budget categories. Instead of including infinite layers of budget granularity, we now separate our money into larger piles of logically separated categories. Here’s a sampling from our monthly budget (I’m leaving out the amounts because I don’t want to get hung up on the numbers):

• Mortgage
• Utilities
• Food
• Auto
• Household Supplies
• Savings
• Debt Repayment
• Insurance
• Clothing
• Medical
• Entertainment

Our goal was to keep the budget at ten categories or less, but we did add one for entertainment. It’s hard to think of an expense that doesn’t broadly fit into one of the categories. Last month, we thought we ran into one such example:  birthday presents for kids’ friends. We decided to just take it from “Entertainment” for now, rather than create a new category for infrequent purchases (although I made the argument that friends’ birthdays seemed to happen at least once a month!).

Another way to combat budget fatigue is to create a number of sinking funds for irregular expenses. We’ve done this in our household. Notice in the budget above I’ve simply listed “Savings” as a top-level category. That represents a single transfer to our ING Savings account, but from there the money is split into several “buckets,” or sinking funds.

We have a sinking fund established for things like the annual renewal of our car tag, the semi-annual payment of our auto insurance, Christmas shopping, vacations, and a couple others. When these expenses come up, we transfer the money from the sinking fund and write a check. No impact on the monthly budget.

I have written this post with sort of a negative spin on budgeting. I hope that’s not what you will take away. Rather, I’d like for you to take away the idea that by making your budget too complex you are setting yourself up for failure. I urge you to consider consolidating categories, or setting up sinking funds, or allowing yourself more “fun” categories so that you can enjoy life. And please, remember to look up at the overlooks!

One of the reasons the idea of budgeting is depressing for many of us is because it is the point in time each month where we realize we don’t have a lot of breathing room. There is simply no disposable income after the mortgage, the car payment, the credit card bills and the rest of our spending categories. What if you could take a magic eraser and wipe out all those debt payments?

Unfortunately, no magic debt eraser exists, but like I tell my son, “let’s pretend.” Let’s pretend for a moment that you do not have any debt. How much different might your budget look?

That’s the idea behind creating a dream budget, an exercise I have toyed with informally a few times, but was sold on after reading a post at Enemy of Debt. Here’s how I created our “Dream Budget.”

1. Grab a copy of your most recent budget. Highlight the amount of total expenses, total income and any savings contributions you are making.
2. Make a second budget minus any payments related to debt. Leave the mortgage payment for now, but remove credit cards, student loans and car payments.
3. Using this new “dream budget,” calculate the difference between total income and total expenditures. This difference is the amount you are spending each month to service debt.
4. Find a new home for the difference. What will you do with this new excess? If you are like most families with a $400 car payment, and several thousand in credit card debt, you could easily free up $700-$800  a month by paying off debts.
5. Break out “savings” category into more targeted goals. Finally, there is enough money to invest in a Roth IRA, save for the kids’ college tuition, put a little away towards a replacement car, and maybe even a little towards a down payment on a new home.

What’s standing between you and your dream budget? Debt. Debt is like a soul-sucking black hole in your financial world. Being in debt is worse than the worst job you’ve ever had, and the worst relationship you’ve ever been in, combined. To put it bluntly, being in debt sucks.

Most of us are aware of this fact, at least intellectually, but by creating a dream budget you finally have evidence of the things debt is robbing from you with each required payment, and it has a way of getting you fired up, emotionally.

Consider just the interest accumulation on your debts. How would you react if your bank was reaching in and grabbing $148 a month out of your checking account? You would be outraged, and rightfully so! Well, that’s the equivalent of allowing credit card companies and other loans to tack on interest each month on a large balance of debt. Get rid of it once and for all, and free your budget up to do bigger and better things.

Keep this dream budget handy if you feel motivation for your get out of debt plan waning. It might just be the kick in the pants you need to get back on track and make your dream budget a reality.

When the time comes to set up your debt free budget, consider using Mvelopes to create a virtual envelope budget.

With the month of March coming to a close (that was fast), my wife and I sat down yesterday to hold our monthly budget committee meeting.  It occurred to me that in the sixteen months or so of writing here I’ve never mentioned them before.  I’ll save you all the boring details, but will share a few of the types of things we discuss that help keep us on track going in to the next month.

Budget Committee Meeting Minutes

Balance checking account.  The first item addressed is our checking account, which by this point in the month could usually use a quick balancing and reconciliation with our online account.  We make sure all outstanding checks are accounted for before “closing out” the month’s final balance and begin tracking the new month.

Review last month’s budget.  It is also at this point that we perform a final review of our budget categories together to determine where we missed the mark, and where we were successful.  The review for March revealed I spent too much money on eating out.  My excuse was that I was on the run a lot visiting my mom (who remains hospitalized), but really that’s a poor excuse – I could have packed something to eat or waited until I got home.  Sometimes you just can’t account for everything when setting a budget a month in advance.

Update personal balance sheet.  If we have stuck to the plan this part is always something to look forward to, but if we have spent more than we should, or not saved as planned, we usually dread this review.  Take an inventory of all your debts and update their balances in whatever format you use to track your net worth.  We use a simple Microsoft Excel worksheet with a column for each month and a list of debts and assets down the side.  Looks like we are on track as our debts continue to get smaller, and our savings continue to grow.

Modify budget amounts for next month’s expenditures.  Some months we just carry forward the budget amounts from last month, but it’s rare.  There always seems to be something happening, especially when you have kids in school.  Yearbooks, camp registrations, clothing, and spring pictures were all mentioned yesterday and affected a couple categories.

When my wife and I first married I handled all of the bills by myself.  After a couple years my wife began to take a passive interest in the finances, but was never particularly interested in knowing all the gory details of debt, account balances, etc.  Basically she just wanted to know how much was in the checking account at any given time.  I recognized that to pull off our financial turnaround I would need her support, and started holding these monthly meetings to discuss our finances.

At first the budget meetings seemed like a chore, but over time my wife enjoyed having input in the process, and I certainly appreciated her input.  With us working together we were blindsided far less by unexpected expenses.

If you are not currently doing something similar with your spouse, I highly recommend sitting down tonight and reviewing finances together, even if it means missing the latest episode of Desperate Housewives.  That’s what TiVo is for!

If you listen to personal financial advice very long you are bound to hear the term “sinking fund” tossed around.  Unfortunately, it is usually mentioned in passing as if everyone knows that a sinking fund is, and how to use one to improve the management of your personal finances.

A sinking fund, in the context of corporate finance, is a sum of money identified by a corporation to be held aside over time for repayment of some item – usually preferred stock or a bond issue.  Companies do this to make it less painful to repay a bond at maturity by moving incremental amounts into this fund while the bond is outstanding, rather than having to come up with the full face value when its time to pay.

In the personal finance world we can use sinking funds to help prepare for large, infrequent expenses that come along throughout the year. A prime example of such an expense is car insurance.  Many insurers allow customers to pay monthly premiums for a convenience fee (my company charges $4.00 per monthly payment).  I can easily save $24 by rejecting the monthly payment arrangement and agreeing to pay once every six month, when the auto insurance policy renews.  But this means I have to come up with a hefty sum of money twice a year to cover the premium.  This is where sinking funds can help.

Some prefer to create a separate account for each sinking fund, but I prefer to create one account, and then simply separate the money using something like Microsoft Excel – a paper ledger will also do the trick.  The sum of my individual sinking funds adds up to my account balance.

Around the first of the year I opened an ING Direct Electric Orange online checking account to house our sinking fund.  Up to now I was using my emergency fund to cover a lot of these expenses, which is not really what emergency funds are designed to do.  Here’s a look at just four of the funds we have created so far, along with the fund balance five pay periods into the year  Note, I’ve changed the amounts to keep you guessing:

Notice that the larger annual amounts, such as vacation at $1,500, don’t seem quite as scary when you only have to set aside $58 per pay period.  I get paid every other week, so 26 times a year $110 is transferred from my paycheck to my account at ING and allocated to those four funds.  When those items are due, I simply write a check (or use online bill pay or my debit card, in the case of ING Checking) to transfer the amount due, reseting the fund balance to zero.  Interest earned from the sinking fund is swept into my savings account each month and added to the emergency fund.

It does take some discipline to leave the amounts alone as they accumulate throughout the year.  If you do need to access the account in an emergency, you can always cash in and reset the payment amounts based on the number of pay periods remaining until the item is due.  But for the most part I leave the funds alone because having the amount in place when the bill is due is such a nice feeling.

Photo courtesy of GoldenEel

Yes, you read that correctly. Could you live on $800 a year, excluding utility bills, clothing, gifts, car, and house? Your reaction is probably like mine – what’s left?  Well, a lot, actually.  Consider how much money leaks through your budget on things like food, pet food, entertainment, and other miscellaneous categories.

I stumbled across a blog post at Jane4Girls $800 Annual Budget that proves it is possible to live on an $800 annual household budget (by “household” I mean things like food, cleaning supplies, health and beauty supplies, etc.). Here’s an excerpt from her site which explains the mechanics behind how she pulls it off:

I have basically put $800 cash into an online savings account. This is for 4 people, one adult, 1 teen, two tweens and two dogs.  This averages out to 54¢ per person per day. Any time I have to pay out of pocket for something I will use a credit card that I earn rewards on, either cash back, gift cards back or college savings. Then I will transfer that purchase amount from my online account to my checking account to cover the cost of those items when the bill comes in.”

It is hard to believe a mom and three kids (and two dogs) can really live on $66.67 a month, but when you really dig in to Erin’s system you find that a lot of what she uses has been stockpiled and/or acquired by combining store sales with coupons.  That is a great strategy, and one we tried last year after signing up for the Grocery Game.  The service published a list which matched up store sales with available coupons from the Sunday paper (and a few online sources).

During weeks we stuck to the game we saw some significant savings, usually around 35% off regular, retail grocery store pricing.  However, we also found ourselves buying a bunch of stuff we didn’t really need, just because it was a “rock-bottom price.” As the stockpile of unused stuff began to grow we realized that stockpiling wasn’t working for us because we bought more of the things we didn’t need and that offset the savings of buying the things we did need.

It is an interesting exercise nonetheless, to imagine just how low you could go on annual household spending. Without knowing much more about Erin I assume she is doing this because she has to, and we are fortunate that we don’t have to mind our pennies quite as closely. I would rather spend a little more on things like food to eat healthier meals, more fresh produce, etc. rather than always hunting a coupon bargain.

Still, there are some opportunities for us to cut costs, and use more coupons on the foods we do buy, particularly basic staples.  I get bored too easily to track spending at such a granular level for an entire year, but I might just try something similar for the month April. Stay tuned.