These 4 Easy Steps Will Teach You How To Budget (Finally)

Old-school personal finance books tell you that if you just create a budget and stick to it, then-POOF!-all your money problems will be solved. But anybody who has ever tried budgeting knows it’s complete crap.

In fact, only one out of every three Americans creates a formal budget every month.

You know you should budget, but you also know you’re not really going to do it. Learning how to budget isn’t the problem, and here’s why:

  • You can visit any one of hundreds of personal finance blogs to read about budgeting techniques
  • You can download free spreadsheets here and on countless other sites
  • You can pick up one of dozens of books
  • You can use any one of dozens of budgeting apps-many free

And even if you write down every dollar you spend for 30 days (which, done manually, is a complete pain in the ass), you’re still human.

Over the past five-plus years, I’ve experimented a lot with budgets. I’ve set monthly budgets, annual budgets, and weekly budgets.

I’ve tracked my spending using paper and pencil, spreadsheets, and apps like And through this I’ve learned something:

Tracking spending manually is pointless.

I never keep up. And I’m a financial blogger-a total nerd about this stuff.

If I can’t do it, I don’t expect you to. Monthly budgets are useless because we underestimate our monthly expenses.

There are some things you just have to pay for every month, such as housing, transportation, utilities, food, and debt payments.

Then there are things you pay for less than every month, like car repairs, home improvements, trips and vacations, holiday gifts, and insurance payments. For you, these less predictable expenses may only be 10 percent or so of your total spending. But for me (especially after becoming a homeowner) they’ve crept up to more like 30 percent (home repairs aren’t cheap).

And here’s what this means. Accounting for, and “pre-spending,” every dollar you make can be a financial mistake.

If I take my annual take-home pay, divide it by 12, and proceed to spend that amount every month, I’m going to be in trouble when that unexpected car repair comes up, or it’s December and I have to do my holiday shopping.

So what you need to do is stop obsessing over the detailed, track-every-penny budgets you’ve always been told were the solution and instead, you need to implement a simple spending plan.

What is a simple spending plan?

A simple spending plan is an easy way to budget that helps you save money, get out of debt, pay your bills on time, and still allows you the freedom to spend money on things you value – within reason of course.

Recently, a funny thing happened to me. I was in the doctor’s office waiting for my physical and I picked up an issue of Money Magazine and randomly turned to a page that actually recommended the same thing: stop budgeting!

As a way to reduce financial stress, the piece recommended to ease off budgeting, saying:

“Money (or its lack) is the nation’s most common source of stress, reports the American Psychological Association. Making a detailed budget – a widely advised fix – only makes things worse, says Cleveland financial planner Kenneth Robinson, based on a decade of work with clients; the problem is that people hate to think about where they’ll need to cut back.”

In other words, when money is tight, focusing on that fact day in and day out doesn’t do you much good. And the magazine’s fix for the problem is the same as mine: a simple spending plan.

Step 1: Track your spending automatically

Forget about manually tracking every beer and burger. The goal is to set up a system that keeps track of all of your spending electronically without any additional work from you so that you can access it if and when you need to.

You can do this easily by using the single-card method. This is when you use just a single debit or credit card for all of your purchases-or as close to all of them as you can-and let technology do the tracking for you.

One of the best ways technology can help our wallets is by eliminating the need to use cash, and therefore, eliminating the need to keep track of our cash expenses. Now this is counterintuitive to what a lot of old-school financial gurus say about cash helping you spend less.

While that’s partly true, the fact is cash can also get lost and stolen. And, more importantly, cash is on the way out.

Electronic payments are here, like it or not, and the times you need cash (for anything) over a debit or credit card are fewer and fewer. But the best thing about using a credit or debit card is that you automatically have a record of all of your spending.

So should you use credit or debit?

The age-old question. If you have a tendency to buy things first and figure out how you can pay for them later, stick to a debit card. But if you’re comfortable with a credit line and only charging what you can pay back in full each month, credit cards are more useful than most debit cards for tagging and categorizing your purchases.

With most cards, you can also export your transactions to spreadsheet…which, for the nerds like me, is where the fun begins.

If a single card isn’t for you, use a personal finance management tool.

As an alternative to the single-card method, there are personal finance management (PFM) tools. These applications link to your credit and debit cards, aggregate your transactions, and can even categorize them automatically.

You set spending limits, and they can send an email or text when you hit them. These apps are powerful and effective…if, of course, you remember to login occasionally and make sure the categories are right, and view your tallies.

But even if you don’t, that’s OK. The important thing is that data is there if you need it.

Step 2: Know your monthly “nut”

Setting up a personal finance app or downloading all of your credit card transactions is great for historical analysis of where all of your money goes. Looking forward, however, this data is less important.

What you need to know are your fixed monthly expenses. Things like:

  • Your rent or mortgage
  • Utilities and insurance
  • Loan payments (student, auto, etc.)
  • Minimum credit card payments
  • Desired savings, investments, or additional debt payments*

That last one is important. It’s vital that you calculate how much you want to save, invest, or use to pay down debt first.

To find what’s left, do the following:

  • Total your fixed monthly expenses (your Nut).
  • Figure out your net (take-home) pay, per month.
  • Subtract your Nut from your take-home pay.

This is what’s left to spend, also called your spending allowance (discussed below). You can spend this on whatever: food, gas, beer, travel.

Here’s a snapshot of our simplified version (which you’ll receive when you join our free weekly newsletter group):

Of course, if something big happens, you may need to spend money on that and have less for fun stuff. That sucks, but it’s also why you should have a bank account buffer™.

Then there’s the issue of having NO leftover money.

What do you do then?

OK. Deep breath.

If money is tight, it’s likely there won’t be much (or any) left to spend after you’ve laid out your necessary monthly expenses and what you hope to save. In the short-term, you can reduce-but not eliminate-your savings goals while at the same time trimming spending.

Forget about trying to trim your food budget by $25. Look at big places you can save, like:

  • Getting a roommate
  • Refinancing your mortgage
  • Earning more money

Cutting little things gets you a little bit of money. Making big changes gets you a lot of money.

Step 3: Put your money on autopilot

I first read about putting my money on autopilot over 10 years ago in The Automatic Millionaire by David Bach. The entire book is devoted to setting up automated systems to manage and invest your money.

This does two glorious things:

  1. It eliminates worry. You stop wasting time thinking about stupid things like “Did I pay the electric bill this month?”
  2. It protects you from yourself. Automated finances make it harder for you to sabotage your money. No more late credit card payments (and the associated fees and damage to your credit score). No more skipped IRA contributions. And on and on.

The idea of automating your finances isn’t new. In fact, another writer who has taken the idea of automated finances to the next level is behavioral finance guru Ramit Sethi.

He lays out simple plans for automating your personal finances on both his blog, I Will Teach You To Be Rich, and in his book by the same name. He’s a vocal advocate of what so many other financial “experts” for some reason refuse to acknowledge.

Our generation doesn’t want people our parents’ age telling us to just “set up a budget” and “cut back on lattes”…the latter a direct jab at Bach, who trademarked the term “Latte Factor” to describe how a daily coffee habit can eat into long-term wealth. Instead, we want to be able to spend our money consciously, even when that includes things we want, like a latte.

And the key to that is automation.

Further reading: Put Your Money On Autopilot

Step 4: Spend the rest without worry using a spending allowance

The amount of money that you have left after your monthly expenses and savings is what I call your spending allowance. It’s how much you can spend this month (on whatever you want) without worrying.

Using whatever method you’ve set up for autopilot spend tracking, you can keep a simple eye on how much of your spending allowance you’ve used for this month. For example, by setting up a goal in Mint or using the single-card method for all of your day-to-day spending.

This is what I do: if my family’s spending allowance is $2,500 in a month, I can eye our credit card balance throughout the month. If it reaches $2,000 too far before the end of the month, for example, I know it’s time to ramp down the spending a bit.


This is a lot to digest. But here are the key themes from this article:

  1. Budgets are overrated. They create stress and we don’t stick with them.
  2. All you need is a spending allowance. Instead of tracking dozens of categories of spending, know how much you can spend per month-your spending allowance-after you’ve covered big expenses and savings.
  3. Forget manual spend tracking. Keep an eye on how much of your spending allowance you’ve spent with Mint or by simply using one credit card for everything you buy. Cash is dead.