Ah, budgeting. New year, same old goals? While I’m not one of those people that think everyone needs a detailed budget, I do think everyone should track their spending at least once a year or so. This way, you have a real snapshot of where your money is going (which may just surprise you). Writing down every little transaction on a piece of paper or even tapping it into your smartphone can get really tedious. So here’s what I do to manage it in 15-minutes a year.

Put All Your Spending On A Credit/Debit Card

The main idea is to put all your spending in an electronic format so that a bank keeps track of all your purchases for you instead of little slips of paper. If you don’t like credit cards, use a debit card. But credit cards offer superior consumer protection features, so I prefer them. You don’t need to put it all on one card, but it does make things simpler.

Now, do this for a month, and avoid paying cash whenever possible. Don’t change your spending behavior, and there is no need to record anything.

Sign Up For Mint.com

Next, you should sign up for the online aggregator tool Mint.com. I also like versions of Yodlee, but it looks like their development has slowed significantly. To start, all you need is your e-mail address and the login details for your credit card website.

I know that many people are wary about giving out their login credentials, but in my opinion your credit card login is not as sensitive as say, a bank login. Credit card companies make so much money that they are happy to refund any fraudulent charges immediately. It is in their interest to make you feel very safe about using credit cards.

Anyhow, Mint has improved their back-end system so that most credit card information syncs up fairly quickly. Click on the “Transactions” tab on the top of the page, and you should see all your recent purchases. You can wait until after a month of spending on the card, because Mint should upload all your historical transactions within the last few months.

Categorize Transactions

Without any input from you, Mint will have tried their best guess for the Category of each of your purchases. They’ve gotten better, but there will likely still be a few that are incorrectly categorized or simply left labeled as “Uncategorized”. In addition, some of your purchases from a megastore like Walmart/Target/Costco might be “groceries” or it might be “electronics”.

Use the the pull-down menus and spend a little time “teaching” Mint the proper categories that you prefer. If you want all future CVS purchases to be under “Groceries” instead of “Pharmacy”, you can click on Details and make a rule that will do that for you automatically. This saves lots of time in the future.

Finally, if you have certain transactions that you wish to have Mint ignore in your budget calculations, use the “Exclude from Mint” category.

Pretty Pie Charts!

After all your transactions look nice, click on the “Trends” tab on top, and check out some pretty pie charts created from your spending history. The charts are very interactive, click around and drill down into your data. You might need to go back and re-label some expenses to get everything to sort nicely.

Now you should have a clearer idea of where your money goes. If you have bills that you had to pay by bank account, you’ll want to account for those separately if you don’t want to sync it up with Mint. If you make some small cash purchases, just track your ATM withdrawals. I just made a rule that labeled all ATM withdrawals “Dining Out”, since that’s usually where it goes.

I was in a discussion about budgeting and eventually decided that there are two primary types of budgeting by households. I called them “bottom-up” and “top-down”. However, there are some differing definitions of these terms floating around, mostly in connection with businesses or governments. So first, some quick definitions:

Bottom-Up Budgeting is focusing on your spending and trying to manage each one. You keep track of your spending, either item-by-item with lists or by category using software like Quicken or Mint.com. You look at each expense somewhat holistically and decide consciously if you need to cut back or if you are happy with the amount being spent. Whatever is left, is put into savings.

Top-Down Budgeting is the simpler, big-picture type of budgeting. You decide how much you want to save from your income, either by percent or total amount. Examples: I want to save 10% of my take-home pay. I want to save $1,000 a month. After you figure how much you want to save, you just try to set that aside, and spend the rest however you like.

Alternatively, you might say “I want to spend $3,000 a month total.” I still consider this top-down budgeting if you are not looking at each expense separately each month. The focus is still basically saving some fixed amount for the future.

Share! Vote in my poll…

What method of budgeting do you prefer?

• Bottom-up budgeting, focusing on expenses
• Top-down budgeting, focusing on overall savings rate
• Neither, or a mix of both.
• I don't need no stinkin' budget.

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I’ve been catching up on my stack of old magazines, and in the process discovering a bunch of new websites. One appropriate site to mention is Bundle.com, which describes itself as the “first money comparison site that lets you see how people just like you spend and save money.” Here’s a promotional video from them which walks you through it:

For example, this is what the households in San Francisco, CA were spending their money on in December 2009:

“House & Home” does not include mortgage or rent, but are things like utilities, home repair and improvements, and phone service. “Health & Home” includes insurance, child care, pet care, and charitable giving. Where does the data come from? Via their FAQ:

With a team of experienced statisticians and data junkies, we’ve compiled, tagged and sorted data from a (still-expanding) collection of sources. Our data comes from the U.S. government, from anonymous and aggregated spending transactions from Citi, and from third party data providers.

Aha, my sneaky Citibank card! This is exactly the kind of data I would think would be recorded and sold from aggregation sites like Mint.com. Now, is it just me, or is there no data available under the “Saving” tab?

I’ve been trying to track our expenses better using Mint.com, which means combing through transactions and manually correcting many of the automatic categorizations. I think it’s working, at least in that I hate doing it so much that didn’t make a purchase today so I wouldn’t have to categorize it later. 🙂

I found the home page chart greeting me today amusing:

We did pretty good this month, but it would seem like all we do is eat and drive (and in the case of fast food, probably both at the same time). I notice that housing and utilities aren’t included, but I’m not going to tweak the targets until I have a couple months of spending data first.

A reader recently asked me about what I thought about the fact that financial aggregation site Mint requires you to give them limited Power of Attorney when using their website. There was also a recent discussion on Bogleheads about it. You can find it in the Terms of Use Agreement page.

For purposes of this Agreement and solely to provide the Account Information to you as part of the Service, you grant Intuit a limited power of attorney, and appoint Intuit as your attorney-in-fact and agent, to access third party sites, retrieve and use your information with the full power and authority to do and perform each thing necessary in connection with such activities, as you could do in person. YOU ACKNOWLEDGE AND AGREE THAT WHEN INTUIT IS ACCESSING AND RETRIEVING ACCOUNT INFORMATION FROM THIRD PARTY SITES, INTUIT IS ACTING AS YOUR AGENT, AND NOT AS THE AGENT OF OR ON BEHALF OF THE THIRD PARTY. You understand and agree that the Service is not sponsored or endorsed by any third parties accessible through the Service.

Sounds serious! My first thought is that without this clause, Mint could not perform their intended service of being a one-stop shop for all of your online financial accounts. They would essentially have to walk up to every single site and ask for permission to be an official portal for them, yet at the same time be released from liability. That would be basically impossible.

In the end, you are giving up some of your rights in exchange for the convenience of having all your accounts checked for you at once. If you are worried about something going wrong with either Mint, a rogue employee, or a malicious hacker getting access to your personal information, then you might consider limiting what accounts you link.

Along that line, I would think that credit cards would be both the most helpful to link since you can then track your expenses, while also having the least exposure to fraud. This is because as long as you report any fishy behavior to your credit card issuers as soon as you find it, you likely won’t be liable for any unauthorized charges. (And if you monitor regularly with Mint, you’ll be that much more likely to notice…)

However, I for example would be more hesitant to link my Vanguard and Fidelity accounts with the bulk of my IRAs and brokerage accounts, as the benefits aren’t as great. Most of my net worth is stored at those brokers, and any screw-up would be highly stressful. Besides, I can usually check my balances at those sites separately with little added effort.

What do you think?