Archive for July, 2010

Credit Cards and Envelope Budgeting

Friday, July 30th, 2010

I often have people write asking how to handle credit cards with the envelope method of budgeting.  Many people use credit cards to rack up reward points and pay off the balance at the end of the month.  There are two methods one could use, and NeoBudget users have successfully been using both methods.  Which one will work for you really is a matter of preference.

Method #1 – Separate Accounts

The method that is most true to the envelope method of budgeting is to keep track of your credit card in a separate account tab from your checking account.  You can download your credit card statement in a format supported by NeoBudget (currently QIF, OFX, and QFX which most banks and credit card companies support).  Then import that statement into NeoBudget just like you would your checking account.  The difference is that your credit card account will always be negative.

Throughout the month, your credit card account will keep getting more and more negative.  You can create envelopes inside this credit card account to track different categories of spending.  For example if you use your credit card only for gas and groceries, just create those two envelopes.

Now at the end of the month, you can look at the negative balances and know exactly how much to transfer from the corresponding gas and groceries envelopes in your checking account.

For example, lets say you have a $250 credit payment due.  Looking at your credit card account in NeoBudget, you can see that $150 was spent on gas and $100 was spent on groceries.  When you pay your credit card, simply record this transaction in your checking account and take $150 from your gas envelope in your checking account, and $100 from groceries.

Method #2 – Same Account

Another method that has been used is to track your checking and credit both in the same account in NeoBudget.  The benefit of this is that what you see in NeoBudget already accounts for your spending on your credit card.  So if you have $200 in groceries in your checking account and you spend $150 on a credit card, your envelope will say $50 even though you haven’t yet paid your credit payment.

To do this, simply import your credit card statement directly into your checking account in NeoBudget just like you would your bank account statement.

There are two pitfalls to watch out for with this method though:

First, this makes balancing your budget very difficult.  You can’t just go down the list and compare transactions with your checking account.  You need to look at both accounts and add the ending balances.  It can get tricky and confusing if there is an error somewhere.

Second, when it comes time to pay your credit payment, you have to fudge the books a little bit.  Since you’ve already recorded all the transactions in your account in NeoBudget, when you make a credit payment you are really just transferring money from one account to another.  And since both accounts are tracked inside the same account in NeoBudget, it’s a wash.  You either don’t record the transaction at all, or you record it twice: -$250 (the payment from your checking account) and +$250 (the payment into your credit card account).

You also need to track interest.  Usually this will show up in your credit card statement as a separate line item, so it should import just fine as if it were another transaction.

Conclusion

I recommend method #1 as it’s easier to track.  But I know of many people who use method #2 successfully.  It really boils down to doing what works for you.

Do you have a method that I haven’t mentioned?  Please let me know!

Posted in Budgeting Tips | 1,278 Comments »

Paycheck Budget Planner

Thursday, July 22nd, 2010

Planning your budget can be a daunting task, and this is often the reason people never get around to sorting out their financial life.  Thankfully, NeoBudget offers some tools that make this very easy.  Using the income allocation tool in NeoBudget, you can easily determine how much money you need each month to pay your bills and meet your savings goals.

This tool can even figure out your monthly budget for irregular or long-term expenses.  For example, auto insurance is often a semiannual (6-month) bill.  NeoBudget will figure out how much you need to save out of each paycheck in order to have enough to pay that bill in 6 months.  No more panic when the bill comes due!

1. Enter your paycheck information

The first thing to do is go to Settings and click on Income.  You need to create an entry for each regular paycheck that you receive.  This doesn’t need to be a fixed amount each month, but this tool assumes a fixed amount.  (Handling irregular income is covered in another post.)

Click on “New Income Source”:

Now you’ll see the Income Editor.  Enter the name of your employer, and the amount of each paycheck you receive.  You also need to specify the pay frequency.  The most common payment frequencies are shown which includes every other week (bi-weekly), twice per month (semi-monthly), and weekly.  This is used in the budget calculations later.

2.  Enter fixed expenses

Some expenses that you have are easy to figure out.  You may know that you spend $50 per week on gas, or that you want to save $25 per week for eating out.  In the example below, we have a bi-weekly paycheck (every two weeks) and we’re saving $50 out of each paycheck for eating out.

Each column represents a separate paycheck for the month.  Notice the headings “1st check,” “2nd check,” and “3rd check.”  Notice that the 3rd check is highlighted in green?  That’s because when you’re paid bi-weekly some months have three paychecks and some have two.  You don’t need to worry too much about that, because NeoBudget handles the complex math needed to average it out.  In general, you can be assured that if you use this tool, things will average out and be fine.

3. Enter complex bills and savings goals

Not all of your envelopes will have such simple savings goals.  For example, your mortgage envelope might include all the expenses related to your home.  By clicking on the “Edit” link in the “Budget” column, you’ll see a budget calculator that helps your calculate your monthly savings need to meet your goals.

In this example, I know that my monthly mortgage payment is $984, I have an annual property tax bill of $1250, and every six months I have to pay homeowner’s insurance of $312.50.  By entering all these values and specifying the frequency of each expense, NeoBudget does all the complex math to calculate your monthly budget.  This is the amount you need to save every month to ensure you have enough money to pay these expenses.

4.  Fund your monthly budget from your paychecks

Now that you know how much to save each month, you need to fund it from your paychecks.  You can click on the amount and it will automatically distribute it evenly across your envelopes.  Or, you could do it yourself if you want to save more from the first paycheck and less from later ones.

You may notice in the example below that the three paycheck allocations don’t add up to the monthly budget amount.  Remember that the 3rd paycheck column is a bit special, in that you don’t get that paycheck every month.  NeoBudget calculates the amount you need from each paycheck spread out across the whole year.  So you may get two bonus paychecks (3rd checks) in a year, not every month.

Concluding thoughts

Using this tool, now you will know that you’ll have enough money to cover your expenses.  When you record your paychecks as you’re updating your budget, simply choose the income source and paycheck number from the list, and the amount will be automatically distributed across your envelopes (see below).

Posted in Tutorials | 1,548 Comments »