Tuesday, January 17, 2017

Why You Should Only Use Three Categories for Your Expenses Budget

I teach an entrepreneurship and financial literacy elective to 8th graders.  I have learned that when it comes to the topic of family or personal budgets, simplicity works best.  I've seen all sorts of budget templates online, most of them unnecessarily complex.  While adding multiple categories can provide layers of detail to a household budget, it can hide or at minimum endorse, certain expenses.

For the expense side, you only really need three categories: 1) Fixed costs, 2) Variable costs, and 3) Non-necessities.  When you add categories like, Transportation, Loans, Entertainment, Utilities, Daily Living, Housing, and so on, the budget sheet takes on a life of its own.  I get it, personalizing your family budget by adding columns, headings, and colors can be a ton of fun.  Not!  Sure, you may have been using the same budget template now for a decade and it works for you.

As the saying goes, "if it ain't broke, don't fix it."  I too had been using the same budget template for several years.

 As you can see from the picture, I had several categories and the Excel spreadsheet allowed me to sort any way I needed.  I've seen templates with a similar style, a long laundry list of fixed and variable cost items all under an "expense" column.  While this may work, it's not going to help (as much) when it comes to making a push to save more.  After teaching my students using an example, balanced budget from PwC's Earn Your Future Curriculum, I decided to adopt this style for my family, but not just because it's simpler.

 You don't teach the skill of budgeting for the sake of your students knowing "how" to do it.  You teach the skill so that they know "why" they're doing it.  So after the basics, I tell my students that the ultimate goal of a budget is to identify opportunities to cut spending.  "Wasting money is stupid," I say to them.  "Plus the more money you save, the more you'll have available to buy assets."  Yes, they know what assets are by this point.

The PwC template makes it easy for me to provide my students with an easy to grasp savings strategy.  I ask, "If you were going to cut back your monthly expenses, where would you look to do so first?"  This template is so intuitive.  Of course the response is, "Non-necessities."  This is why I love this budget style so much.  You are forced to differentiate your variable expenses.  More importantly, you are showing yourself the map to future potential savings.

Budgeting doesn't have to be a chore.  And a budget should be a visual that doesn't take an accounting degree to make sense of.  If an 8th grader can't take one look at your budget and tell you where to slash, perhaps you're making it too hard?  According to a 2013 Gallup pole, only 1 in 3 Americans prepare a "detailed" household budget.  Maybe it's because Americans see too much effort needed in being detailed?

What are your thoughts on household budgeting?  Please share your comments below.

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