However I do believe there are things that all good budgets will have in common.

1. Track every cent

A budget is a tool that helps you achieve the first rule of personal finance: spend less than you earn. To do this the budget needs to record how much you spend and how much you earn.

How much you earn should be relatively easy to track – it usually comes from a few sources in known amounts at regular intervals. Spending is harder to track. It goes towards dozens of different expenses in varying amounts at many different and overlapping frequencies. If a budget is needed it is typically because there is no accountability on spending and it is outstriping earning.

The first priority of a budget is to create an accurate picture of where the money goes. It must make a record of where everything is spent – every single cent. One reason you do not know where all the money is going is because a large percentage of it is going in small, incidental spending that does not register as an expense. It might be the $3 coffee every morning or the magazine picked up while waiting in line at the checkout register.

You have to record spending yourself, preferably as you do it. The budget should help you by making it as quick and painless as possible.

2. Account for commitments

Many expenses come regularly. As such they are predictable and a budget should take care of the predicting.

One wrinkle in budgeting is that not all regular expenses occur at the same frequency. Most will be out of step with the rhythm of the budget. A budget must account for the effects of quarterly and yearly bills while working on a monthly basis.

3. Plan for the future

When an expense is not regular it can at least be planned for. This could be saving for a new car or putting aside an emergency fund.

A budget should incorporate savings plans for these planned but irregular expenses. Such plans typically involve a target and a time frame, turning a large expense into a series of smaller ones.

And when the plan is complete it can be dropped from the budget which leads to the next point.

4. Adapt

Circumstances change. The unexpected happens. Even without calamity the act of scrutinising spending will change spending habits. The budget you make today will not be the budget you need in six months time.

A budget cannot be static. It must adapt to changing habits and absorb disasters without becoming unusable. It should not get weighed down with the dead wood and scar tissue of budgets past.

5. Recount history’s lessons

In my mind this is a contentious point. For years I have kept monthly budgets in spreadsheets, carefully archiving each month as it finished. I have years of records there.

But I never look at them.

What I do at the end of the month, before I close the spreadsheet for the final time, is try to discern patterns and warnings for the coming month. Are we consistently over spending in a certain area? Has a new regular payment started? I use the information to alter next month’s budget or spending.

The leassons need not all be bad. Seeing you have your spending under control, that you are finally ahead of your debts, are important too. Every small achievement encourages more.

The important thing is history’s lesson, not the history itself.

So a budget needs to show you how far you have come, and point out what could be done better. In this way it encourages change.

What a budget cannot do for you

Go back over the points above and you will see that all the budget can do is inform, remind, plan and teach. The action has to come from yourself. The change has to come from yourself. Without acting on what you learn, without changing your habits, a budget is just pushing numbers around.

What do you think? Have I missed anything? Or am I just plain wrong? Let me know in the comments.

The process is broken down into three steps. First, set up a budget. Second, record your transactions. Third, view reports reports on the result. All very simple and very easy to understand. The help section steps you through the whole process if you have trouble with it.

Something that is not obvious until you have used the site for a while is that every month is a new budget. The first time you log in at the beginning of a month you will have to create a new budget. Thankfully you can choose to copy the previous month’s budget. You are then free to make changes. In this way the budget can easily evolve and stay relevant. On the downside you can loose the sense of continuity from month to month. Budgets are goal setting exercises. One aspect of compelling goals is constant, measurable progress. Without being able to seen the progress from month to month you loose some of that impetuous.

The Budget Simple system encourages you to create a balanced budget every month. I am not entirely sure why this is promoted, it would seem to be prompted by the philosophy behind the budget though such a philosophy is never explained. You can always set up any excess income as a “Savings” category.

However while the site encourages a balancing of the books it does not go out of its way to help you do it. The total income, total expenses and the difference are not updated as you add and change categories. To get the totals you must reload the page. Similarly on the transactions interface while the totals for categories update with each transaction entered, the budget total is not.

Entering transactions is somewhat counter-intuitive. To enter a new transaction you do it from the transaction summary screen. When you save the transaction it disappears and updating of the category total is the only sign of its passing. The category total is now a link and clicking on it takes you to a list of transactions in the category. However the name of the category does not appear on the page – you have to remember what you clicked or work out where you are from the listed transactions. Transactions can be updated or deleted in the list, but new transactions cannot be added here – you have to step back out to the summary to add a new transaction. Also the transactions are in the order they were entered, not in the date they were paid.

I imagine a scenario where I want to enter a week’s worth of reciepts, but being slightly disorganised I may have entered some of them already. For each one I would have to open the transaction list to see if it is already there, then, when I was sure its not in the list click back to the summary to add it as a new transaction. The fact that the transaction list is in the order entered means that not only is it harder to locate previous entries, but if I do enter the same transaction twice they will not appear next to each other in the list, so the duplication will be harder to find.

Budget Simple is very new and still under development. This is made obvious by ocasional errors and by sections of the site with “coming soon” as their sole content. Maybe I have stumbled onto it too early in its development. On the technical side I can see it is written in PHP and jQuery 1.2.6. It is under active development and from the the personal tone of the home page appears to be the work of a lone developer.

Pros

• Its 100% free.
• Simplicity – It is very easy to fully comprehend a system this simple.

Cons

• Too Simplistic.
• Not very helpful – Small things like updating totals and ordering by date would greatly improve the usability.
• Still in development – Expect bugs and changes. Many of the supporting features of the site are simply non-existent.

Cost

Free.

Inzolo is obviously designed to support a very particular way of budgeting – it has something to do with envelopes and its zero based – but the system is not explained on the site. If you do not know what envelope budgeting is it would be best to understand it at least in principle before trying to use Inzolo. (I give quick overview of it further down the page.)

The site is still in development. I understand that it is a poor use to time to create tutorials for a product that is still evolving, however the underlying system is unlikely to change in the long term. Laying out a high level overview of goals and use of an envelope budgeting would greatly benefit those coming to it and Inzolo for the first time.

There are some instructional videos in the help section where Dustin explains how the site works, but not why the actions are been done nor what the ultimate objective is.

Inzolo’s budgeting system was derived from the work of author Dave Ramsey. His latest book is The Total Money Makeover: A Proven Plan for Financial Fitness (that’s an Amazon affiliate link by the way) which is one place to go for instruction on the system.

For those not familiar with envelope budgeting here is the briefest of run downs. An envelope budget consists of a number of envelopes. Each envelope represents a category of spending – food, rent, clothing, etc. When money comes in (from a pay check for example) it it divided between the envelopes. When it comes to spending money you go to the envelope for the expense and see if there is enough money for it. If there is you take money from the envelop for the expense, if not you either wait until there is enough in the envelope or move money from another envelope. At the end of your budgeting period if there is any money left in an envelop it stays there and is added to for the coming period. In the good old days the envelopes were paper and contained cash. These days the envelopes are more likely to be categories in a spreadsheet.

Inzolo does all this.

To start with you go through a simple wizard to make a list of envelopes. By default this list is one envelope for each bill which are then grouped into categories. This can make the interface very daunting in the beginning as you you will typically have a long list of dozens of envelopes to manage.

For simplicity’s sake I would suggest starting with just half a dozen categories with a single envelope in each, or one category with half a dozen envelopes. As you become familiar with the system you can break out more envelopes and rearrange them as you see fit. Envelopes can be reordered and recategorised by dragging them around.

A shorter list of envelopes will help you in a number of ways. A feature of the site is that you can assign an expense to an envelope by dragging and dropping. However if the envelope is off the screen when you start dragging, which it often is with a long envelope list, you cannot get to it to drop the expense on it.

Apart from dragging and dropping, which is great for small, discrete expenses, you can also split expenses across several categories. This is good for when a single credit card item includes items from different categories. You open the expense and split it across as many envelopes as you wish. The interface will total up how much you have yet to allocate as you go along.

Similarly when money comes in it is usually in lump sums that have to dealt out to all the envelopes. In this case Inzolo helps you by allowing you to save a particular distribution as a template. It can them be applied to future income. This is really helpful for those of us with a regular income.

Finally the site is set up to take advantage of open financial exchange (OFX) feeds. These are used by nearly every American bank to automate the downloading of transaction records over the Internet. I have talked about my problems with automated downloads before. In Inzolo’s case most of those problems are side stepped. While you transactions can be entered automatically they then have to be allocated to envelopes manually. In the process large transactions can be split across multiple envelopes. Finally you can always enter everything manually, unlike Mint.com.

I should mention that this site has a build in bias for monthly budgeting. When setting up envelopes you are asked for a monthly target amount. With weekly or quarterly expenses you are forced to convert them to monthly totals outside of Inzolo. For a site that does so well with all its other automation tools this seems an oversight.

The interface may not be something you are used to in a web application. Hidden in the list of envelopes on the left of the screen is a whole lot of functionality that can be accessed through drag and drop and edit-in-place. Expect to see more of this kind of thing right across the web in the future. In the case of Inzolo the interface’s functionally is not reflected in its appearance. The videos in the help section reveal a many of the hidden features – just be prepared to watch several times to catch them all.

As a total aside to how effective Inzolo is as a budget, as a web developer I can immediately see the jQuery UI and FamFamFam’s ubiquitous Silk icon set in use. Dustin is obviously a kindred spirit.

Features:

• Automatically download of online bank records via OFX
• Manually upload bank records via OFX or Quicken file
• Extremely rich web application interface
• Good automation tools that still leave the user in control.

Things it does right:

• Rigorously supports its chosen budgeting method.
• Balances flexibility with tools to automate processes.

Things to watch out for:

• You need to understand envelop budgeting before you start using Inzolo. There is no high level explanation of the budgeting system it has encoded.
• The inbuilt wizard breaks you budget down into too many envelopes.
• The site is still under active development – expect occasional bugs and feature changes.

Cost:

There is are free and pro versions of Inzolo.

The free version restricts you to 3 months of transaction data and limits some of the bank integration functions. It is also supported by advertisements. When you first sign up for the free account you are given 90 days access to the fully featured pro version.

The pro version is US$7.23 a month and is advertisement free.

With OFX transaction records can be downloaded to financial software and online applications automatically. It saves a lot of time. It saves a lot of effort. It saves a lot of potential mistakes.

It sounds like a good thing.

I am not so convinced.

Before I go further I would like to point out that I live and bank in Australia. Banks here are not so enlightened as to use OFX. The best that can be done with Australian bank statements is export and import files from their online banking facilities. Am I sour because I cannot wield the automagic of OFX? Yes. Has it made me biased to automagical budgeting altogether? Read on and form your own opinion.

It is more important to know where money goes than where it came from.

My first ever system for budgeting was to watch our bank accounts. I would record a daily snapshot of the balances and go through the transactions line by line. I did not automate this system other than using web banking.

It was a frustrating exercise. I could see the balances going down. I could see where the money was being spent if I paid by credit card or EFTPOS. I could see cash go into our wallets as ATM withdrawls. But it did not tell me what it was being spent on.

The result was that I was left guessing where the money went and what I could change to make our dollar go further. After making the changes there was then no easy way to see if it was effective.

In the second interation of our budgeting system I stopped looking at bank statements and focused on recording every single cent we spent. I was not concerned with which account the money came out of – it could have been a credit card, savings account or cash.

It is more important to know where the money goes than where it came from. You are trying to get a handle on your spending, trying to get it under your earning, and recording the spending as you spend taps directly into that information.

I see three problems with bank statements being your primary budgeting record.

Firstly, it lacks enough detail to tell you where your money goes. It can tell you how much was spent and where if you use a credit card or EFTPOS, but not what was actually purchased. Using cash leaves even less detail in bank statements.

Secondly, bank statements aggregate expenses. A trip to the super market might involve purchases for food, pets, cleaning and any number of other categories being tracked in the budget. To be accurate the one transaction on the bank statement has to be distributed amongst those categories.

Finally, if your budgeting is on autopilot then your spending can be as well. Having to note where every cent goes – collecting receipts, making notes and updating a budget – heightens your awareness of where all the money goes as it is going.

In this post I list all the reviews I have done and those I plan to do.

Reviewed so far

• Mint (mint.com) – Unfortunately I am an Australian without an American bank account so my experience of Mint.com is short and unproductive. more…
• Pear Budget (pearbudget.com) – A simple and well presented online budgeting application. more…
• Inzolo (inzolo.com) - An envelope budgeting application that balances flexibility with tools to automate common processes. more…
• Budget Simple (budgetsimple.com) is a simple budget. Perhaps too simple. more…

In the wings

These are the sites and applications that I know about and plan to review in more detail. I am sure this list will get much longer.

• Thrive (justthrive.com)
• You need a budget (youneedabudget.com)
• Budget Pulse (budgetpulse.com)
• Billster (billster.net)
• Expensr (expensr.com)
• Mvelopes (mvelopes.com)
• Buxfer (buxfer.com)
• LiveSmart Budgeting Tool (livesmart.net.au/money-matters/budgeting-tool)
• Budget Tracker (budgettracker.com)
• Just Budget (justbudget.com)
• Dimewise (dimewise.com)
• Microsoft Money
• Quicken Online (quickenonline.intuit.com)
• Wesabe (www.wesabe.com)

In case it is not obvious this post will change over time. More sites will get added to the to do list, entries will move to the done list. I do not know how kosher it is to be constantly editing a blog post, but that’s what I am going to do.

See anything I have missed in my list? Is there a site or product you are using now that you recommend I look at? If so tell me in the comments.

Pear budget

It has been developed by Charlie and Sarah Park to be a “pared-down budgeting” tool – an aim that ultimately also gave the tool its name. In their own words:

We looked at a bunch of different budgeting programs, and we realized that they tried to do too much. They tried to do the wrong things… We’ve spent two years crafting this application, paring away everything that isn’t absolutely crucial for keeping a budget.

There are no fancy charts and no automatic downloading of your bank records, just a simple three step process.

First,  plan your budget. This involves entering your income, regular monthly expenses and irregular expenses (those that occur less often than monthly). When you first go to Pear Budget this step is simplified even further with a wizard that I will talk about later.

Second, enter your receipts for the month. This is all done by hand. There is no connection to your bank account or bulk import option. The site creator’s state that this is by design, part of their “pared-down” philosophy. They claim entering your receipts by hand keeps you more in touch with you spending. Additionally having the site link directly to your online bank accounts creates an unnecessary threat to the security of those accounts.

Finally, review reports of your spending. By default the report is for the current month, but you can also see a breakdown by year or a simple list of entered receipts. For each of the categories you entered you can see what you planned to spend (from step one), what you have actually spent (from step two) and the difference.

And that is pretty much the whole of the application – Create a budget, enter receipts and view a report. That simplicity, and the straight forward language used to explain it, make the site very easy to understand and use.

When you first come to the site you can start creating your budget without registering going through any registration process. Rather than educating the user on the benefits of budgets or the features of the site, its puts them in control straight away.

The site promises to have a budget set up for you in five minutes, and with its very good wizard it can be done. The wizard makes adding the most common expenses to your budget as easy as checking some boxes from a list. You can then enter the amount you spend and rename the provided labels to make it your own. The text in the wizard is also quite empowering with its constant encouragement to “put something in now and fix it so it is right later”. This really does allow the user to get a long way into making the budget their own on first finding the site without stressing about getting everything right first time.

You can enter tags against any of your receipts. This allows you to view reports grouped by tags and also to put extra data into the receipts lumped under one category. So for example if you had two cars you could create a tag for each one and use just one “Car” category, then at the end of the year be able to attribute costs specific to each one.

You can also set up a recurring receipt to to be automatically generated on certain dates in the month. The same item can be generated on several days in the month, so if you have a weekly payment to make you can set it to be generated on the 7th, 14th, 21st and 28th of the month. Unfortunately the generation cannot be set up to for a certain day of the week, so the dates would have to be adjusted every month if the payment was every Wednesday for example. Similarly there is no way to set up regular payments that occur less then monthly, such as quarterly or yearly bills.

This then is perhaps where this otherwise brilliantly simple site misses the point – it is hard coded to operate on a monthly period. Even without using the recurring receipt feature, the site caters only to monthly and yearly cycles. If you have weekly or fortnightly expenses then you are expected to multiple them up to a monthly figure, if you have quarterly bills you must multiple them out into a yearly amount.  You would also have to do this every month as the number of weeks and the occurrence of weekdays in a month is not regular.

Features:

• Budget creation Wizard
• Recurring payments automation
• Export records to file
• Delete all user data on closing account

Things it does right:

• Keeps everything extremely simple and straight forward both in features and the language used to describe them. It lives up to its “pared-down” claim.
• Provides a very good wizard for setting up your first budget.

Things it could improve:

• Does not allow the user to work on any period other than monthly and yearly – which could be a problem if you plan to budget in sync with a weekly or fortnightly paycheck.
• Does not allow bulk importing of receipts.

Cost:

Free 31 day trial then US$3 a month or US$30 a year. Payable by credit card or PayPal.

Do you use Pear Budget? If so I would greatly appreciate hearing about your experience and the get your opinion of what it does right and where it could be improved.

Mint.com

Unfortunately I am an Australian without an American bank account so my experience of Mint.com is short and unproductive.

I can register for the site, faking a US postcode by entering 90210 (which must be vastly over subscribed on Mint.com by foreigners who watched TV in the 90s). However after confirming my email address and next step in the Mint.com process is entering login details for your bank account. There is reassurance that this is a totally secure process and that any American bank you care to belong to is supported.

My Australian bank is not.

Without a supported American bank account I can get no further into the Mint system. I can only talk about Mint in a theoretical sense. From here on in is speculation.

Obviously having automated access to your bank statements is fundamental to the way Mint works. The user also sets up a budget with categories and spending goals. As transactions appear on your linked accounts Mint captures and categorises them.  First it tries to match the transactions against transactions the user has categorised in the past, if it cannot find a pattern to follow it asks the user for a category and learns from that input. Eventually the Mint system should be able to automatically categorise most of your usual statement transactions.

When it comes to non-statement transactions, for example those things you pay for with cash, I am not sure what Mint does, but I assume it must have some way of capturing these.

I do have some concerns about fully automated recording of expenses. Aside from the fact that to achieve this you have to give your online banking details to Mint and all the security concerns that raises, I question whether taking the user out of the expense recording process is a good thing. In my own experience one of the most powerful impacts manual budgeting has had on me is that having to note where every cent goes makes me pause and think about spending it to start with.

If anyone has firsthand experience with Mint I would love to hear exactly how it works and your opinion of it.