Setting up an effective and functional budget

I've discussed the importance of savings in previous blog entries. How to do it effectively? I've been keeping track of my income and expenditure for the past few years and I've finally nailed down an effective system that works.

In order to make a realistic and effective budget that I can keep up, I've been keeping track of all of my incomes and expenses. Not only do I record my financial activities into an excel worksheet, such as when & where each item occurs, how much, and involves which account (e.g. credit card? checking account?), I've also categorized all my transactions. On a monthly or any arbitrary period, I add up all my activities according to categories that I've set up. This way, I can get an overall view of how much I've earned and spent in each category.

The key to keeping track of financial activities is strike a balance between getting a summary (big picture) view vs. sufficient granularity so that I can identify which is most profitable and where I spent the most; i.e. finding leaks that I can plug. This is why categorizing each transaction is important, so that I can keep a summary table of categories, where I can track and eventually budget in advance.

To start with, each account has its own manila folder, preferably the pocket kind so receipts and invoices don't fall out of the sides. Each week, record all those transactions into my excel worksheet. My template is to have one row per day, and at least one column per account. The columns are not fixed, I have at least a dozen columns to handle several transactions per accounts and for multiple accounts. So each label includes what it's about (vendor, supplier, what it's about, category) and also which account. I have set up excel functions for each account to tabulate only transactions of that particular account. On the side, I have a list of different categories, and associate with each category, there's a summary value for each month. I also include how far away from the budget and what is the monthly average for this year and the last. This way, I can predict how much I will need to allocate for next year's budget.

The beauty of this system is that I can keep track of not only what's going on, whether my finance has deviated from history, my current progress and what else I need to do to reach my goals. If you want a copy of my excel template... shoot me an email.