How We Manage Our Finances

The Budget ProblemMoney 99

I’ve been trying to figure out how to manage a budget for almost a decade. When I was working through college, I purchased a copy of Microsoft Money 99 to categorize my income and expenses. I used it religiously, keying in receipts and importing downloaded transaction files. It worked pretty well: I knew what I was making, and where I was spending it. Microsoft issued Money upgrades every year and I faithfully bought every other version.

Getting married introduced a new level of complexity, but Sarah was accommodating to my system and stacked ATM slips, grocery receipts, and bills in my inbox so I could key them into Money. Microsoft shipped a feature to categorize my downloaded transactions, but it was often wrong — meaning I’d have to spend time reconciling transactions with my bank statements at the end of the month. This was my least favorite exercise and I often let data entry go a month or two before I would find a spare weekend to download and correct the data.

From time to time, I’d try to print reports from Money to show Sarah where we were financially. I was able to generate things like pie and bar charts, but the information never felt actionable and we would leave conversations about finances little more assured then when we started. Worse, printing reports from Money took reams of paper. Charts were always fit to a whole page, and inefficient tables produced pages of empty whitespace around a few columns.

Money 2006

Later changes in Money got me seriously considering a break-up. Money 2006 had a complete GUI makeover, using the same uglystick Microsoft perfected with Hotmail: what was once a refined user interface suddenly felt like it was designed by Fischer Price. Database corruption was common and, though quickly fixed with the Restore feature, got me wondering about the danger of proprietary lock-in — if that database was hosed, we were screwed. On top of all that, a pet peeve of mine was never solved over my eight years’ experience with Money: there was no real helpful way to categorize credit card payments as an expense AND a transfer.

A New Sense of Urgency

Last year we had our first child, and I had a whole new sense of urgency to solve the household budget problem. My wife left work in January and I didn’t know if our lifestyle was sustainable on a single income. After more than a little prayer, I set out to find the One True Metric of any household budget: income vs. expenses. It’s a number — income minus expenses — that tells you whether you’re breaking even at the end of the month. If it’s positive, you’ve got money in the bank; if it’s negative, then you’re breaking out the credit cards.

So, inspired by a simple graph of donations in my church bulletin, I produced a bar graph to show income, expenses, and the balance on a month-over-month basis. The good news was that we were in the black. Further influenced by a coworker, I set out to create a one page dashboard of our entire financial story. Unlike Money, I took the approach of cramming as many data points into this page as possible while maintaining readability. The end result was a two-page document that describes our finances from both a high-level overview and a detailed expense report for the year. Every month, I update the spreadsheet and post it on the refrigerator so we can refer back to it from time to time.

The Budget Overview

The first page provides an overview of our entire financial situation: the first column contains a month-over-month snapshot of Income vs. Expenses, followed by Key Expenses, and then Investment values. That’s followed by the second column which shows a month-over-month view of Debt, Savings, and Retirement. Trends quickly become visible at a glance.

Another iteration of the spreadsheet added a third column which shows year-over-year forecasts for Debt, Savings and Retirement — all of which are dynamically calculated from values I plug in right on the page. Across the top, I’ve provided our short- and long-term goals to remind us where we’re going.

The Budget Detail

The second page provides a month-over-month breakout of how every dollar flows in and out of our checking account. To the left, I’ve grouped categories by Income (green for good!), fixed expenses (yellow: not likely to change), flexible spending (orange: might change unexpectedly) and out of budget (red for bad!); I can also tell when a bill is coming due by the Day column. In the following columns, I can compare monthly average expenditures against our budget to anticipate where we need to adjust.

Following to the right, I’ve provided a “heat map” for each expense per month: red for over budget, gray for on budget, green for below budget (vice-versa goes for income categories). On the right, a Year to Date running total and percentages that tell me what portion of our income or expenses are made up of each category.

Finally, at the top right is the One True Metric: a percentage of expenses vs. income. If that number is positive, then we’re living within our means. If red, then I know we need to control spending somewhere before it becomes debt.

Sample Report

Link to an example of the two-page printout, populated with fake data, below.

I’ll provide a link to the spreadsheet itself and a technical overview later on how this report is actually generated, but I do have to say that producing this document would have been a lot more difficult — maybe impossible — without Wesabe, my financial management tool of choice. Their simplicity and openness really enabled me to pull this information together into Microsoft Excel in a very straightforward manner. Setting up an account with Wesabe is step 0 in this whole process, because you need to get a handle on cash flow before you can start to analyze your overall budget.

The Catch

I was very hesitant to share this spreadsheet. The more we used and refined it, the more excited I got about it. But, I’ve fallen victim to false hopes in software and process before (as any number of Palm devices I’ve owned could tell you). We’ve now been using the spreadsheet for a year, and I’m assured that it works. We get actionable, meaningful information about our finances that we can plan on and talk constructively about. My wife and I feel more confident in our finances than any other time in our marriage.

The problem is: it’s really wonky to use. You have to really know how to use Excel features like Conditional Formatting and Pivot Tables, and have a firm grasp on formulas. Adding new budget categories is simple, but not trivial; tweaking forecast charts requires fiddling with complicated amortization tables; and God help you if you want to plot new credit cards or savings accounts you don’t know how to use charts. I do this stuff for a living, so it’s straightforward, but still takes me a couple of hours at the end of every month to churn.

My hope is that I can invoke the lazyweb (or, better, the well-funded-capitalist-web or even the clearly-self-motivated-web) to take up making a real system of this idea. I want to be able to hand something to my family and friends and have them derive the same benefit with a tenth the technical learning curve it takes now. If you’re interested, getting in touch is good, but downloading, hacking, and posting your results on the web is better.

Getting this right could really change the lives of lots of people for the better.

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10 thoughts on “How We Manage Our Finances

  1. For crying out loud.

    I don’t know the first thing about all this stuff. I use Numbers. I have a simple budget. “You can spend X on food. Your bills cost Y. You can save Z in December if you cancel Netflix.” Amortization? Sounds like a Warcraft damage modifier.

    *cowers in corner, suddenly very afraid of economics*

    😉

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  2. @John B — lol. Sorry, that was pretty nerdy. Amortization just means breaking up an interest-bearing account over it’s individual payments over a certain term. For example: listing every monthly payment of a 30-year fixed mortgage.

    The benefit is that you can see the balance change over time, which is what I needed for those long bar charts to the right.

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  3. Dude. You are a class “A” geek. You’re smart. I dumb.

    And I envy your low “gas per 2 weeks” bill.

    But all that smart stuff made my head hurt. I’m sure it’s better to do it your way, but my way hurts my head less.

    If we have the money in the account, use the money in the account. If not, use the credit card. Don’t spend any money you don’t have to.

    Of course, variables like living with 3 females never do good for my strategy (one female is a cat, but litter is money and so is peed on couches, fancy feast [the cat gets a fancy feast and I’m eating hot pockets], etc.)…

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  4. wow, you budget $80 for gasoline? i remember when my gas budget was that low. Last time i looked i was budgeting $400 a month to gas, and that is AFTER buying a new car, i was budgeting $700, buying a new car saved me $50 :-P.

    That is the most insane spreadsheet i’ve seen for doing this type of stuff. I do like the layout of the family budget snapshot, its pretty nice.

    Just out of curiosity, why aren’t you using something like quickbooks or quicken or something? These are applications that were written so you don’t have to write your own. You’d ultimately save a lot of time and get the same basic information. You mentioned why you got off Microsoft Money, but i never heard anything good about MS money but have heard tons of praise for things like quicken.

    Of course this is coming from a guy that doesn’t track his money /at all/. After the end of the month if my bank account is still above my ‘buffer’ amount the extra goes to my savings ‘zeroing out’ my account back to my buffer amount. If it dipped in, it comes out of savings. Easy enough, takes 3 minutes a month to do all my financial stuff. :-P.

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  5. @Jai Woo! I made Class A! Thanks.

    The whole exercise was to come up with a way to show where our finances will be for the whole year and spot trends. Dipping into credit cards too often was a major concern, and I knew if the trend continued for too long before I caught it, we’d be in dire straits.

    My next goal is to work out our finances 3 to 5 years down the road. Part of that is figuring out when to buy a house. Peering that far out is a little trickier.

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  6. @Mike Our 2007 average expense for gas was $90/mo. This year, I’m targeting $120. That’s the nice thing about living in a city: we can walk around the corner for groceries, laundry or restaurants. Public transportation to and from New York, while not cheap, definitely saves us on gas, too. We rarely drive more than 10 miles in one shot, mostly to visit family.

    I shopped around a LOT for financial planning software, especially after we switched to the Mac (which Money doesn’t support). Quicken’s UI was surprisingly bad, especially for the Mac, so I didn’t have high hopes for it’s reporting. I’ve also looked at things like iBank and Gnucash as well as online tools like mint.com. I did settle on using wesabe.com for our ledger because of it’s simplicity and export capability and would highly recommend it.

    My single-most important feature for this software was reporting, and every package I used lacked sophistication (including Wesabe). The coversheet for our spreadsheet combines balance histories, category analysis, forecasts and goals across accounts on a single sheet of paper — nobody else is taking their reporting to this level. I only have to glance at the fridge to see where our finances will be for the year, and often do while I’m getting ready to turn in for the night. Sarah and I can have ad hoc conversations about our finances just by standing in the kitchen — a big difference from huddling around the computer to start up a piece of software or printing a packet of reports.

    Last year was really make-or-break for us to see if we could get along on a single income. We needed to know well in advance whether we were going to run aground with our expenses — I didn’t want to be in a position where we were reacting to a trend that started three months earlier. Otherwise, the zero-out technique might have worked for us.

    We also eliminated about $1,000 from our expenses last year by slashing our home phone, cell phone and car insurance bills. We sold some of our unused stuff (like a fondue pot that went unused for five years) on eBay and our yard sale, earning another $600. The budget spreadsheet helped track that income and plan on what to do with it.

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  7. You thinking about packaging/patenting that app? Seems like a lot of people would use it, and knowing your impeccable penchant for usability (and dude, my job title is web usability specialist, so I know you got it mister!), I think people might take some interest. I dunno…

    “if geeks build it, morons will buy.” – Fieldset of Dreams

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  8. WOW. If there someday exists software or a webap to let me do what you do, I would totally invest in it. I do no budgeting whatsoever, and I know that I need to start doing so, ’cause praying for a husband who’s finance- and tech-savvy like you, Ken, ain’t gonna cut it.

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  9. I’ve learned to live with Money, I just have extraordinarily low expectations about “reports.” The cash flow feature is nice to show planned income and payments, though. And come tax time, I am living in self-employed heaven when it sums up my business income and expenses for me-probably around 1000 random transactions throughout the year.

    You are on the right track. Riches don’t lie in money, but in a peaceful life lived within your means. Remember that Alexander the Great couldn’t watch BSG and Louis XIV didn’t know what a cold Coke is. We are far wealthier than almost anyone who has ever lived.

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