Your Personal Budget Plan Just Got a Whole Lot Easier

by Neal Frankle, CFP ®

How much do you think you spend each month on your personal budget plan ? Take a guess. (We’ll need to refer back to your number later, so please write it down. Thanks.) You know what?

Most people underestimate their monthly budget by 30%.

Can you see how dangerous that mistake can be? Let me give you an example.

The Plan... Pictures, Images and Photos

I asked Bob how much he thought he spent on average each month and he said $4,000. Then, I asked him what he earned and he proudly reported that he brought home over $4,500/month. So I asked him what he did with the $6,000 he saved last year. ($500 not spent each month…12 months…$6,000 over the year. Right?) He looked at me as if I were from Mars.

Bob told me that he hadn’t saved $6,000 over the last 12 months. He actually increased his credit card debt by over $12,000. In other words, Bob was spending $5,500 on average – not $4,000…right? (He spent $12,000 more than he earned last year, which works out to be (on average) $1,000 a month more than he earned. Since he earned $4,500/month, he spent $5,500 on average.) This fellow needed to learn how to stop spending money – stat!

Thinking you spend $4,000 a month but really spending $5,500 is like thinking you’re flying over the ocean when you’re really over the Rocky Mountains. Sooner or later something very unpleasant is going to happen. If you care about reaching any financial goal, you should deeply care about knowing what you spend on average. Why?

Because if you don’t know what you spend on average, you’ll never reach your financial goals. You’ll never know what you can and cannot afford to buy or do. You won’t know if that vacation or car is within your reach or not. You’ll never be financially balanced. You might have some foggy ideas, but you’ll never really know. You’ll never be at peace with your spending or financial situation. On top of that, you’ll never be able to hold on to a credit score you can be proud of.

While you might be spending too much, you also might not be spending enough if you don’t have this information.

Anna, another lady I met earns $4,500 each month and spends only about $2,000. Because she’s been on her own for many years, she’s deathly afraid of overspending. But because she didn’t take the time to calculate her average monthly spending, she went without for too many years.

That’s a high price to pay. Especially when you consider how easy it is to get this information.

So here is the question:

How to budget? Here are the steps I recommend:

1. Don’t start by using budget tracking software or writing down every time you spend.

Don’t get me wrong. If you’ve been tracking all your expense for years, don’t stop. I use You Need A Budget and I love it. But if you haven’t, now is the wrong time to start. Lots of folks invest in some software package or start writing things down and then stop.

Oh…they might start off by doing it for a few days, weeks or months. But sooner or later, too many stop. Why?

Special Tip — To see how powerful this is, get your credit score now and then check it again in 120 days. You’ll probably see a big improvement. You can even get your free credit score, no credit card or trials required.

I conjure up a few reasons:

1. It’s a lot of work.

2. It takes time.

3. It’s a possible reminder of how out of control we are or have been. It’s a negative re-enforcer. It’s just not any fun.

4. We track our spending but our partner doesn’t. As a result, the data is meaningless.

On top of these reasons, some folks can’t see the benefits of doing it. They think they can’t change anything about their financial situation anyway, so they just throw their hands up and hope for the best.

I’m not going to deal with that last issue in this post (I’ll leave that for another time). But I think there is a way for you to track your spending in under five minutes a month and to have fun doing it. And if you implement these suggestions, you’ll know what you and your family spend – even if your partner doesn’t participate.

2. Turn your bank statement in to your bookkeeper.

Your bank statement tells you what you spend each month. It’s the number that is next to the “total withdrawals” column. Usually that number includes:

Total checks written

Total ATM withdrawals

Total automatic payments

That’s it. That’s everything you spend…right?

All you care about (at first) is making sure you spend less than you earn on average. For now, it doesn’t matter how you spend the money.

(Just make sure you use one checking account to pay all your bills and you’ll have all the information at your fingertips. If you use more than one account to pay bills, increase your credit card balance each month or earn and spend cash, the process is more complicated.)

3. Track that one number.

A. Take a few minutes right now and go round up your checking account statements for each of the last 12 months. I’ll wait right here.

B. Open Excel and create a new spreadsheet.

C. List “Month” in Column A and “Total Withdrawals” in Column B. Input the data for each of the last 12 months.

D. Calculate a 12-month moving average to determine what you spend on average.

You are interested in the average, not what you spend in any particular month. Some months are more expensive than others. Some months include property taxes. Other months include vacations and car repairs. These are all facts of life. Expenses aren’t all predictable, but they do find a way of popping up…don’t they? That’s why the average spending is much more important than what happens in any particular month.

E. Update the spreadsheet every month and recalculate your 12-month average spending.

It might take you 45 minutes the first time you do this. But it will only take you five minutes each month to update the information from then on, and it’s well worth it.

In fact, it’s much more powerful than trying to track every expense. And even if you do track your daily expenses, this is an important exercise. You have to calculate a running average in order to see what direction you are going in.

If the 12-month average goes down, you are doing great – you are decreasing your spending. Maybe you can quit that second job. If not, you need to do more work. Go through this exercise the first time and compare the number to the initial estimate you made when you first started reading this post. Are you shocked? Told ya.

Some diehard folks might say that tracking each expense is more important than calculating the average spending. I disagree and here’s why:

a. Tracking your daily spending is only meaningful to you once you see what you spend on average.

b. You will be much more motivated to do a good job tracking all your expenses once you know what the average spending looks like.

c. If you aren’t willing to spend five minutes a month on this, you won’t be willing to spend two hours a week (at least) tracking everything.

4. Talk about it.

Once you have the information, you want to use it most effectively. You want to use it first to see if your average spending is greater than your income. Even if you earn more than you spend on average, this information will help you cut spending and save more. Let me give you an example.

Even though I think I know how to make a small business successful, my income went down when the recession hit last year. As a result, I did this exercise and shared it with my family (my wife and each of my children).

When I did that, everyone became a savings fan – it happened almost magically. I’m also happy to say that they had a balanced approach. They saw how stable our situation was, so they weren’t afraid. But they also saw that we had to decrease spending in order to reach our savings goals.

This process didn’t dictate what to cut – and I think that’s the beauty. It empowered each of us differently. Since we knew we had to cut back, each member of the family made their own value calculation and independently cut their spending. It really brought us together. I wasn’t the bad guy or the ogre.

“Spending less” became a mindset, and believe it or not, it was kind of fun. The results were also really inspiring. The great thing about this is that it gets everyone on the same side. It’s also simple, quick, 100% accurate and effective.

5. Remain watchful.

After you do this for a few months, you may learn that you need to do more to cut costs. This might be the time to start writing down every expense or using software to do it for you.

At this point, you may have to make some “executive decisions” and enforce some cuts, but at least everyone in your family will understand the situation. You have a better chance of the people in your family staying on board. They will understand why you need to make the spending cuts.

6. Don’t stop living.

Just because you cut your spending doesn’t mean you have to live like a pauper. Sometimes a $5 coffee at Starbucks will save you thousands of therapy bills. Find ways to really enjoy your life, and if that means spending a bit more once in a while…do it.

We went on vacation a few months back. Before coming home, my wife suggested we all rent bikes. It was going to cost $40 for an hour. To tell you the truth, I really didn’t want to spend the money. But because I’d done the exercise above, I knew I was being unreasonably cheap…so we did it. That bike ride turned out to be the best part of our vacation. That $40 made the entire trip worthwhile. It’s what I remember most about that vacation.

Relax your rules moderately and mindfully – but don’t do it too often.

How you can put this into action.

You already know how important I think this is for your financial well-being. If you agree, then the best things you can do right now are:

a. Do the exercise I suggested you do above if you haven’t already done so

b. Schedule time in your calendar right now to update your spreadsheet each month

c. Schedule time each month to discuss your progress with your family

Now it’s your turn. What tricks do you use to get your family on the “savings train”? Will you share all the data with your partner and children? Why or why not?


NOTE: I originally wrote this in March and it appeared on Frugal Dad at that time. I updated it and reworked it. Since I feel this issue is the key to financial freedom, I felt it was important to keep the topic “top of mind.”



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{ 19 comments… read them below or add one }

Adrian January 2, 2013 at 12:14 AM

Keeping expenses under control is very important. And to do that it is mandatory to maintain a monthly budget. I am doing this for a few years already and I say that it pays off.


Brana & Harlan March 1, 2010 at 4:25 PM

How do we vote for your blog to win the nominated awards? Congratulations!


Neal October 16, 2009 at 7:06 AM


You are right….if you make transfers, this process becomes a bit more complicated.

I don’t think it matters how you track as you long as you track.

I do think it’s very important to:
a. make sure the number is accurate
b. watch the 12-month average and compare it to the current month.

This has really helped us.


Debtress October 15, 2009 at 12:25 PM

Neil, I see one problem with looking at the total withdrawals: I get my paycheck directly deposited into my checking account, then transfer an amount into savings. Since I often transfer a different amount each month, I’d need to budget these transfers out separately.

I like to keep a running inventory on my spending each month, and track it all in excel. Trusting my banks to provide accurate account statements each month seems to risky for me.

BTW, I really like point 6. It seems my friends fall into two categories: those who are stressed about money because they spend it all, and those who are stressed about money because they save it all!


Daniel October 14, 2009 at 4:30 AM

I agree, I have used Quicken, and Mint just makes everything so simple. I go on, make any small adjustments to categories, and it’s all right there in front of me: balances, budgets, alerts, etc. It is easy to use and makes my life simpler.

I have to admit, that also I think Mint is the best, I guess Neal is right, everyone has their own best. Sometimes we try to impose our ideals or way of doing things, but not everyone works the same way.


Retirement Savior October 13, 2009 at 12:30 PM

I actually use I don’t really use a budget that I check often, but since Mint is automated, I can look in every once in a while to see what I spent, if anything is wrong, and if anything surprising is going on.

Quicken may be the same or better, but the best part about these programs is that I have no desire to put a lot of effort into budgeting.


Matt Kelly October 13, 2009 at 9:13 AM

Justin, sounds like you have a system that is working well for you and you asked some good questions.

The risk of loss is not that great; we were paying more than $400 – $500, about the max we have in the envelopes at one time, a month in interest which is the surest way to loose money.

When you play with snakes you are likely to get bitten. 3% cash back is enticing and the credit cards are not loosing money on that deal – on most people they will eventually make that back in interest.,

I don’t use Quicken – I use a budget, in, that is developed before the month begins. I prefer a proactive approach to budgeting rather than a reactive analysis after I have spent my money.

I just throw my change into a jar at the end of the day. It’s like the debit cards that round up transactions and put the difference into savings automatically.

Most people use free checking accounts that do not pay interest so any “free use of money” for 25 days is theoretical in those cases. Plus, there is no grace period when you carry a balance.

I understand that these reasons may not apply to you. However, for the people I work with as a financial coach the downside of using credit cards far outweigh any risks and inconvenience of paying with cash.

Thanks for your comments.



Neal Frankle October 13, 2009 at 6:45 AM


Glad this worked for you. Most important….congratulation for taking some great action.

This exercise has really helped me get motivated to dig deeper (when required). I’d love to hear how this impacts your spending over the next several months.


Dana October 12, 2009 at 9:12 PM

Hey Neal, thanks for explaining how to do this. I just did it and it was fast, easy, and informative. I still think I need to track my expense categories, but I was getting hung up on the time required. This seems like a really good basic tool.


Neal Frankle October 12, 2009 at 9:10 PM


I can see having the CU account with low balance in order to maintain relationship for future loans. Makes sense. I like that you aren’t actively using the account.

Not really clear on the need for the other account. If it really is worth the complication – great. Again, if u use QUicken and really look at the 12 month average and use that as your benchmark, great. It doesn’t matter. You could have multiple accounts and Quicken w/do all the work for you.

Most folks:
a. don’t use Quicken religiously and
b. don’t really have any good reason for having multiple accounts.

Simple is good in my book. The objective is to really keep on top of what it costs, on average, to live each month. You seem to be doing an outstanding job at that. Keep it up.

The purpose of my post is to allow folks to do that in a very efficient manner. For some reason, not everyone is going to want to use Quicken. We had a case above where Matt digs the envelop system. This really is a case where no one size fits all. There is no ONE best way I think. The main thing is that you are on top of it and that’s great.


Justin October 12, 2009 at 3:45 PM

Makes sense i suppose, i guess i just see it as easy or easier to let quicken do all the work for me and can run a report for 12-month moving average through quicken. I have a few checking accounts of which i really only use two. the others pretty much sit. I use my primary account for paying all bills, depositing money into ect. I have an account at a college credit union that sits and bounces 40 bucks back and fourth between it and a savings account at the same CU. Its free, and if i ever need a loan, they have pretty good rates. If i close the account, ill never get back in as i am no longer a student of CSU staff. Then i have an account at another CU that i also keep for my money market. The checking account at this CU allows me to ACH money over easily from my main back to my checking account at the CU and I can then easily feed my money market.


Neal October 12, 2009 at 2:48 PM


I think the main point or take-away is, to each his/her own.

I’ve been using Quicken for years too (Now I use Quick Books) but I still do the 12-month average. It’s huge for me. It puts everything into perspective and without doing that, it’s very difficult to have that 20,000 foot perspective. At least, that’s the case for me.

I also don’t use cash….almost ever. I use credit cards for everything. I especially appreciate your comment on change. It gets lost so a $.40 pack of gum ends up costing a buck.

I agree that it is important to track more than the gross, but if someone isn’t willing to do that, they ain’t gonna do the other work. And as I said, I feel that the 12-month average provides a different type of information.

Finally, it doesn’t matter how many credit cards you have using this system. You could have 34 cards. As long as you pay them all from the same checking account – it’s fine.

I have never understood why anyone would have more than one checking account. In the 25 years I’ve been meeting with folks, I’ve never been convinced of it being wise.

If you have a business, that’s a different story of course. So I have one checking for business and one for personal. Simple. Easy.

Can you see where I’m going?


Justin October 12, 2009 at 2:21 PM

I Track all of my spending using quicken. It really does not take long at all. Banks have made life much easier now, with quicken, all of my credit card transactions are downloaded into the software, so it is merely a matter of matching receipt to quicken (verification you spend it, they charged the right tip, ect) and then adjusting the category of spending if needed (quicken isn’t perfect)

I am in no way a financial advisor, analysit, or have anything really to advise for finances on a professional level, but i do have a few years of doing things the way I am doing them, and have some opinions.

Daniel: Quicken can sync with your bank accounts as well as your credit cards. It allows you to easily track money in, money out, and money moving between accounts. To me, the cost of quicken is worth every penny.

Matt: I could never see myself using the cash system, and here is why.

1. I do not want to keep that much cash “laying around” and if its not laying around, its in a safe(like it should be), which just isnt convenient.

2. Cash doesn’t get me 3% back
3. Cash transactions do not get auto-posted in quicken.
4. when you use cash, you get change. Where does that change go? I know that I spend money almost every day. if each time i get change back i got 40 cents, thats $146 in change…where did it all go? what happens when i have 2 transactions a day?
5. With cash, i dont get to hold on to my money for an extra 25 days. If you spend $4,000 a month and even just have money in a bank account, that $4000 could for part of your water bill each month.

Neal: I think it is important to track more than just gross monthly income vs expenses. Why? Because some things can be cut alot easier than others. If i spend $500 per month on rent, i cannot easily cut that expense, i have to either move, or try and negotiate with a landlord…not easy. If my total monthly expenses are $3,000 thats %16, so that %16 is relativly fixed. Now, if i am spending $100 on groceries, and $900 on eating out, i can easily see that there is not alot of balance there. I know now that i should cook for myself more, and even with a higher quality of food i can save money. This is something i wouldnt see just looking at a moving average…

basically what i am saying is with technology and 10 minutes instead of 5 you can get a lot more out of your 10 minutes. \

Neal, how many people have just one account, or one credit card? I just don’t see using excel and looking at your statement(s) any faster or easier than using software such as quicken to really keep track of everything.


Matt Kelly October 12, 2009 at 8:56 AM

Thanks Neil, I really like what you have going on here and will be back regularly.



Neal Frankle October 12, 2009 at 9:33 AM

Awesome! Glad to have you aboard Matt! Tell 250 of your closest friends too….(he he he)


Matt Kelly October 12, 2009 at 8:17 AM

I prefer the proactive approach – cash envelopes.

The cash-envelope system is an easy and proactive way to eliminate unconscious spending. This method involves putting a budgeted amount of money, in cash, into an envelope labeled for a specific purpose.

In our household, we have envelopes for groceries, restaurants, entertainment, gasoline, miscellaneous items and spending money. Be careful not to be overly generous in your budget with these items. Every dollar you spend here is one less you have to pay off debt or for your dreams.

For example, if you get paid twice each month and have budgeted $400 for groceries, you could place $200 from each paycheck into the grocery envelope. When shopping, you would take that envelope and spend no more than the money in it.

The same is true for your other envelopes. Out of each paycheck get the cash you budgeted for an envelope and then spend only the cash in it. When an envelope is empty, you are done spending until your budget allows you to refill it.

Cash envelopes can help you create a new relationship with your money and eliminate unconscious spending so you can pay off debt and save for those dreams. The choice is yours.


Neal Frankle October 12, 2009 at 8:51 AM


This is a great illustration that you should do what works best for you.

The key is to be conscious about spending as you suggest. I also think folks get a huge benefit by tracking the 12 month average. This system would take of that too – as long as you stick to the system.

Nice work Matt.


Neal Frankle October 12, 2009 at 7:20 AM


I must admit I’m not as familiar w/Mint as I should be. (My daughter is using it so I’m sure she’ll bring me up to speed.)

If Mint can do all the heavy lifting, by all means, that would be better. I would prefer 12 months data at least – so make sure you can export that and keep a running 12 months average.

I believe the most important element here is to use the data – like the gym – only more often!


Daniel October 12, 2009 at 6:45 AM

I think one of the reasons people hate budgeting is because it takes so much time. Making an excel spreadsheet? Going through 3 or 4 bank and credit card statements? Unheard of.

It’s definitely a great exercise and being an active participant will put you more in touch with your money, but what are your thoughts on sites like All you have to do is enter your account information and it immediately pulls the last 3 months of data and tracks changes in your bank account. A few clicks and you’ve got your average monthly spending from the past 3 months.

Which is crazier, that people underestimate their expenses by 30% or that people overestimate their gym usage by 70%!:


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