You need a budget
Make a budget: who would have thought that three little words could cause so much trouble?
Tracking and, ultimately, improving our finances is an irresistibly simple idea, advice that most of us have either given or been given, and probably both, at some point.
The problem is what the problem always is: putting theory into practice.
Making budgets work
Let's start with three tips that could help smooth the way, whichever budgeting method you use.
1. Do less
As research for this article we looked at hundreds of budgets online and in personal finance books and most of them had one big problem: they were far too complicated.
Many advocated an estimated spend and then suggested tracking actual spending day to day in pages and pages of categories. It's way too much.
Of course, it's always useful to get a snapshot of where your money's going and even - yes, we're invoking the latte defence - where you may be spending far more than you realise in small transactions.
However, trying to keep up with a labour intensive list of everything you buy is, by and large, a useless time suck. Like making endless lists rather than actually doing the stuff on the list (or is that just us?).
The take away: create a way of budgeting that 'works' without you having to pay it constant, will-sapping attention.
For example, ditching direct debits and standing orders for services you barely use and setting up new payments for anything you'd otherwise have to remember, like saving goals or paying your credit card bill, could take an hour and needs little or no maintenance: more here.
2. Set goals
Similarly, we noticed that many budgeting techniques drive you to reduce the cost of everything all at once.
Again, a noble aim but totally unrealistic.
In his book Change or Die, Alan Deutschman notes that, in one hospital, 90% of people who were asked to change their diet after major heart surgery - to literally change or die - couldn't manage it.
Big vague goals like lifestyle change, Deutschman says, are really hard to make.
The take away: Set goals.
There's a reason people decide to run a marathon and it's not to pee down their leg in an animal costume (we hope).
3. Fail better
Beckett wrote, "Ever failed. No matter. Try again. Fail again. Fail better."
We can't all aspire to Beckett's level of failure - Nobel prize Nobel shmize - but the point is well taken.
You'll probably fail in your budgeting endeavours at some point, the trick is finding a way to keep trying and, hopefully, fail less next time.
One interesting study from 2008 found that participants were able to predict their spending for the coming year much more accurately than they could estimate outgoings for the next month.
The difference, researchers concluded, was that people in the year condition added a 'buffer amount' in to cover any unexpected expenses.
Everyone expected the unexpected, just not soon.
The take away: Be prepared to fail. In fact, budget for it.
Budgets we love
As we've seen above, finding the budgeting method that works for your income and what you want from money is key.
But we can all do with some examples of how that actually works.
The month budget
- Use it to: get to the end of month.
- View and download it from Google docs.
- Download it as an Excel file.
According to R3, about half of Britons struggle to make their salary last until their next payday.
25% of respondents to an NS&I poll from April this year felt guilty after overspending because they hadn't planned ahead. Three quarters said they worried about money.
Figures like these reflect the fact that, generally, costs are rising - in some places, like the rental market, rising quite a lot - while wages, again generally, have stagnated.
On an individual level, in other words, many people have got less cash to play with once they've paid for the essentials.
For this reason we thought a budget that separated 'fixed' costs from costs that varied each month would be useful.
The Excel sheet includes some quick calculations to add up the columns so don't type in those boxes (marked in red on the picture) for best results.
There are several different sheets to the Excel file: a blank budget, an example and a sheet of notes and suggestions.
The debt eliminating budget
- Use it to: pay off multiple unsecured debts.
- View and download it from Google docs.
- Download it as an Excel file.
Another budget we really like is this one for crunching through multiple debts.
It's really simple and really focused on goals and motivation in a way that some research claims really works.
Some people call it the snowball method and the very simple idea behind it is that paying off your smallest debt in full - no matter the interest rate - and then moving on to the next one will be much more effective than trying to pay down several at once or going for the highest interest rate first (which makes the most logical sense).
There are some caveats, of course.
The method is best used for unsecured debts like credit cards, overdrafts and personal loans (when they can be overpaid).
No matter their size, priority debts like energy, rent arrears or council tax must always come first.
Find more information and an example sheet in the Excel/Google Docs files.
If you're having trouble meeting debt repayments, especially priority debts, or feel overwhelmed you may benefit from more in depth debt help from an expert. Have a look at our guide to what's on offer.
Using account aggregators to budget
Another budgeting option we like the sound of are account aggregators which promise to bring together all your internet banking accounts, categorise the purchases and let you know when you've gone over budget, perhaps in the form of a colourful graph.
In other words, they promise to take away the annoying, failure inducing leg work of making a budget.
Unfortunately, however, we found that there's a reason this idea sounds too good to be true.
We tested two of the UK's biggest account aggregator services, Lovemoney and Money Dashboard.
Of the two, Lovemoney has the most intuitive and usable layout.
Enter your online banking details (we know, see problems section below) and the application downloads purchases and payments information from the past three months and puts all that data into clear, colourful charts like the one below so that you can see just where your money's going.
That's the theory anyway.
In practice, we found that Lovemoney struggled to automatically categorise purchases by type and, worse, rarely seemed to learn the right category for the same store in future.
Even after some time going through the transactions, a sizable percentage of my monthly outgoings seemed to be going on dental work which is what the site decided to categorise my local Co-op supermarket as.
With attention little and often we're sure this problem could be overcome but it's a bit of a pain especially considering that the budget function depends on these categories.
You can add a monthly budget goal as shown in the screenshot to the right.
Note that you can change the month start date to when you're paid, which is a nice touch.
Once your budget goals are set Lovemoney will track your progress on bar graphs.
Another nice feature is that the site tells you how much people of a similar income are budgeting for categories like saving and food shopping.
Money Dashboard is very similar but perhaps not as swish looking and without the 'community' angle Lovemoney has.
It's also, just occasionally, completely confusing. Surely there's an easier way to say this (see right).
Like Lovemoney, you'll be able to see all your accounts (or at least all those with online banking) but you'll have to categorise all your spending.
The graphs are a nice plus, though.
It's nice to be able to view a number of accounts in one place, it's the unbiased overview you want from a budget.
However, if you were hoping for a budgeting technique that takes the work out of keeping track of your finances we're sorry, this isn't it.
Ever avoided facing the mess that awaits when you log in to your online banking? Us too. And we did the same thing with these services.
As useful as they are, finding motivation remains as important as ever.
More seriously, these sites have a security problem: you're essentially letting a third party have access to your online banking details.
Banks don't like that and warn that, should accounts suffer fraud as a result of using these sites consumers won't be covered for the loss since it constitutes acting without reasonable care.
It's exactly the same argument they've made about unauthorised banking applications.
On the other hand, banks are naturally cautious but sites like Mint, which has over a million users in the US, have been going for years without problems.