We’re entering month four of accurately tracking our expenses using PearBudget, and our second month of creating and sticking to a firm, category-based budget or spending plan. It’s been both immensely rewarding and challenging in ways I did not anticipate.

One of the first and most obvious rewards of budgeting is that you find money you didn’t know you had, because it had been disappearing into countless little black holes. For example, I spent over $120 on espresso in June. With only a moderate effort, I was able to cut this to $26 in August by making coffee at home or work instead of going to a cafe. This isn’t the drudgery I thought it would be; it’s actually quite fun to feel yourself saving money that you’ve been throwing down the drain for years.

A second reward is that you start to think realistically and long-term about irregular expenses, so they stop sneaking up on you. For example, we’ve fallen into the common trap of not planning for home maintenance expenses. We bought our home new, so our repair costs are perhaps lower than most, but there are still plenty of things to fix, and plenty of longer-range projects to save for.

But the irregular budget categories have also proven the most vexing, because it’s hard to know how to carry over an over-budget expenditure or an unused balance from one month to the next. At first glance, it doesn’t seem too difficult to just forward a positive or negative balance to the next month, but when you consider that this is actual money, it gets a little tougher. For example, I need to carry forward enough money to pay my grad school tuition bill when it comes due later this month (budgeted for last month), but I was a little too aggressive in paying down a student loan (a separate category), so the total amount left in our bank account at the end of August was less than I wanted to carry forward for tuition. Oops.

As an aside, you can see why using credit cards, with their loose connection to the amount of real money you actually have, wreaks havoc on accurate budgeting.

I’m solving the above problem by budgeting more for tuition this month, and transferring money out of the tuition category last month to balance out other overspent categories. But other overspent categories will take care of themselves; for example, our cell phone and internet bills both billed us for some of our September service in August, so we should get smaller bills in these categories next month.

PearBudget has an “irregular expense” category type, so you can forward positive or negative balances in each category from one month to the next. For a while, I treated all categories as irregular, so no over- or under-spent category would go untracked. However, this doesn’t work well because we have June and July expenses that get carried forward into the present, and we weren’t actively sticking to a budget back then. Again, that’s what happens when you use credit cards.

For now, I’m exporting everything to an Excel spreadsheet once a month, and manually carrying over any over- or under-spending for each category. It’s not perfect, but it’ll do for now.

One of the hardest paradigm shifts to get used to (thanks, Dave Ramsey!) has been the idea that we need to stop borrowing money. Period. We make significantly more now than we did six months ago thanks to some career advancement, but we’re now both in doctoral programs. Our previous paradigm said it was fine to borrow money for grad school, but Dave says no - if you can’t cash-flow it, don’t do it.

We can (and do) pay out-of-pocket for our current grad school expenses, but it’s painful; I’d feel like we were making more progress if we didn’t have to set aside a huge chunk of change each month for tuition. But you can’t borrow your way out of debt; we’re fooling ourselves if we think borrowing in one category so we can pay off more debt in another category is getting us ahead.

How do you budget?

As a nascent budgeter, I’ve discovered a few reasons my previous attempts at budgeting didn’t result in saner spending and living within my means. I’m using PearBudget now, and while I’m still making mistakes, I have a few lessons to share.

Among the causes of my budgeting failure:

Setting rigid and unrealistic spending limits for each category - this happens when you create a budget without knowing how much you were spending before you started budgeting. Sticking to a budget is going to feel like pulling teeth if you unwittingly slash your entertainment budget (theoretically, the money you spend doing the things you enjoy most in life) by 90%. Start by determining what you’re currently spending, and if something is out of whack (like the $120 I spent at Starbucks this month), make a modest adjustment (like cutting back to $80 for next month, not $3).

Unrealistic amounts budgeted for basic needs - this is a special case of the previous point. When I created my first budget, I was greatly frustrated to realize that we’d under-budgeted for food and gas and other necessities. Given the choice between going hungry (with money in the bank!) and breaking the budget, we chose the latter, spent the entire paycheck each month, and forgot about budgeting for a few years. Keep track of, but do not stress over, budget categories that are absolute necessities and that you can’t do much about (such as your utility bills).

Failing to track irregular expenses over time - one of the great things about PearBudget is that it lets you track those expenses that are sure to come up, but not on a regular schedule, such as car repairs, Christmas presents, or vet bills. See this post for more.

Excuses for buying big-ticket items on credit - I shudder to recall how many times I’ve justified a major purchase on the grounds that I can pay it off quickly, and that I won’t make similar large purchases again and again until my credit card is paid off. Neither of these excuses is true, and both have lulled me into thinking my spending on big-ticket items was under control; my first reality check is usually a maxed-out credit card. Set up an irregular budget category for major purchases, and set aside money each month until you have enough to buy what you want to buy. I recommend an ING Direct savings account, which is free and will set aside money automatically each month.

So, why the post about failed budgeting attempts? Because you can learn from my mistakes. However, I’d also like to learn from yours, so leave a comment if you have an example of what not to do.

I’ve been using PearBudget for about two months now, so I finally have accurate information on where my money is going. It’s not pretty, and not fun, but an essential first step in making better decisions.

One of the best features of PearBudget is that it allows you to track “irregular” expenses - those expenses that don’t come up on a monthly basis, but nonetheless need to appear in your monthly budget (e.g. setting aside money for car repairs).

PearBudget handles irregular expenses as follows:

• You estimate how much you’ll spend for the year, and PearBudget calculates how much you’ll need to set aside each month
• Your balance for each irregular category is carried forward from the previous month
• Therefore, if you have a surplus or deficit in an irregular category, it’ll be represented accurately over the long term, rather than resetting every month

As I start to collect data about my irregular expenses, I’m realizing that I’ve been fooling myself about certain categories, thinking “I’ll just spend less next month to make up for that splurge” month after month. Clearly, you can’t do that again and again and still live within your means.

For example, major electronics purchases are a weakness of mine. I frequently become convinced that I must have a digital SLR camera, a new computer, an iPhone, a scanner, a widget or gadget of some kind. And I always have a reason, a compelling justification for purchasing said item RIGHT NOW. Worst of all, I tell myself it won’t happen again for a long time, so it won’t break the bank. This has not, in fact, been the case over the past few years; major electronics purchases have been an inordinate proportion of my budget - but since I didn’t start keeping track until last month, I don’t know exactly how much money I’ve blown on gadgets. I do know I’ve purchased two $400+ cell phones in the last two years, if that’s any indication.

If tracking your expenditures is the first step to effective budgeting, becoming aware of issues and patterns like this is the second. Up next, of course, is changing spending behavior to address these problems.

The most basic money management principle is to, well, have a budget - plan and track your spending, and adjust as needed.

But most of us don’t. To address this problem, a couple named Sarah and Charlie created a spreadsheet that became so popular they turned it into a web application.

The basics are there - enter your income and expenses, track by category, and adjust as needed. No graphs, bank account synch, or other fancy stuff. Just a clean, elegant interface to do the basics of budgeting.

Mark Frauenfelder of BoingBoing says:

Keeping track of my expenses was one of my resolutions this year. I’ve been using a terrific web-based application called PearBudget to help me keep my promise to myself. PearBudget is streamlined, lightweight, and elegant, and because it’s web-based, I can use my iPhone to enter receipts as soon as I get them.

It’s a truly beautiful app. You can try it for 30 days for free; after that it’s $3 a month. #

I use a spreadsheet as my checkbook register, so I’m not sure if I’ll duplicate this effort on PearBudget, but if you’re not currently tracking how you spend your money, PearBudget might be a good place to start.