Budgets in Quicken Essentials for Mac

I've written before about how budgeting as done by older versions of Quicken falls somewhere between less than useful and misleading. I knew that Quicken Essentials for Mac wouldn't implement envelope budgeting. So, while I'm dubious about its utility, we're aiming for completeness here, so I figured I should give QEM's budgeting a whirl.

Why not just use Quicken's budgeting, part 2

In my previous post I wrote about how envelope budgeting does a good job of preparing for large, periodic expenses, like property tax or car repairs. Today I'm going to argue that using Quicken can fool you into thinking that you're taking charge of your money, when you really are just tracking your money after it's already spent.

I first started using Quicken back when I was young, dumb, and single. I was making good money, I didn't have much in the way of expenses, and I frankly didn't balance my checkbook terribly often. Quicken was a huge leap forward for me. It was super easy to enter in transactions, it felt really good to assign categories to expenses, and that happy alert box you got congratulating you for balancing your checkbook was very validating. I geeked out for a while, creating an elaborate taxonomy of expense cateogories, and there was even a brief period where I was keeping track of my cash expenses down to the penny. (I had a lot of time on my hands).

Fast forward a few years, and things are more complicated - I'm married, I have kids, a mortgage, and some much more significant expenses. I still dutifully entered all of my transactions into Quicken, categorizing away, balancing monthly, but it was just arranging the deck chairs on the Titanic. We were falling into debt, and quickly.

How could this happen? Wasn't balancing my checkbook keeping us in control? Well, no. Sure, I could run a report and tell you how much we were overspending, and it what areas. In fact, I would do that from time to time. My wife loved it, as I'd run this sort of report, reality would come crashing down, and I'd be just a delight to be around for the next couple of days. "We can't go on like this! How could we spending all of this money?"

Using Quicken to enter and categorize transactions was giving me the illusion of control, but there was no control. Sure, I could do some forensic accounting, and I could tell you to the penny how far in the red we were, but on a day to day basis it was not helping us manage our expenses.

In order to have control of your money you need to know what you're doing with it before you spend it. At the time that you're spending some of your money, you need to know that it's not going to mess up the rest of your month. Envelope budgeting does this for you. Relying on Quicken's built-in reports is like getting in your car and driving for a while, and then using your GPS to figure out just how lost you are.

Why not just use Quicken's budgeting, part 1

If you're new to envelope budgeting, but used to traditional budgeting, you may wonder what all the fuss is. Quicken's got a budgeting tool -- why not just use it? Let me answer this question in two parts.

For me, the most important reason is because not everything is a monthly expense. Yes, much of our money is spent on things every month -- mortgage, rent, bills, groceries -- but there are occasional expenses as well. It's these occasonal expenses -- property tax, car repairs -- that can get you reaching for that credit card if you're not prepared.

Rather than letting these big expenses surprise you, the best defense is to save up a little bit of money every paycheck. If you know you're going to spent maybe $2000/year on car repairs, and you get paid twice a month, then you should be setting aside a little more than $83 per paycheck into your car repair envelope.

Setting this up in a traditional Quicken budget just doesn't make sense. Most months you're on well on the positive side, and then when you actually go out and spend the money, it shows significantly negative. As an extreme example, check out this budget graph for my property taxes:

There's no way that I can tell how well I did from such a graph, nor would I be able to know, mid-year, that I'm on track.

To be sure, I'm isolating just one category of expense in the graph above, and you could argue that what I should be looking at is my overall expenses across all categories. Even then, traditional budgeting tools fail -- the highs and lows might be trimmed down a little, but it's still going to show big up and down swings when you have major expenses. Worse yet, you can fool yourself into thinking that you're staying on budget if you see numbers that are matched up on a monthly basis across categories, but if you're not saving up for those big expenses (actually showing a surplus in many months), you'll be caught flat-footed when those big bills come.

That's it for part 1 of why Quicken's budgeting tools don't lead you on the road to financial freedom. In part 2 I'll talk about planning vs. forensic budgeting, and how Quicken makes you feel like you're in control when you may not be.

What's Envelope Budgeting?

Someone was asking me recently what I thought of mint.com, and I said that I wished it supported envelope budgeting. "What's envelope budgeting?", she asked. I've mentioned it here on a few occasions -- here's what I wrote to her:

In a nutshell, envelope budgeting means that you have cash on hand before spending money. In the old days you would cash your paycheck into actual cash, and then divvy up the cash into envelopes marked "rent" or "gas" or "clothes" or what have you. When it came time to buy something or pay a bill, you could only spend the money that you had in that envelope. There's nothing keeping you from moving money from one envelope to another, but the assumption is that you're wise and you're not going to take all of the money out of "rent" to go buy stuff.

Obviously we don't use cash and envelopes anymore, but the theory is still there. A financial management system that supports envelope budgeting wouldn't show you what your checking account balance is as much as how much money you've got in your set of virtual envelopes.

This is different than what Quicken or mint.com or a bunch of other financial management tools do. Sure, Quicken lets you categorize your expenses, but it's more forensic accounting ("where did my money go?") than a planning/saving tool. The power of envelope budgeting is that you're giving each dollar a name and a purpose, putting you in control of your money. Envelope budgeting is also much better than traditional budgets for more occasional expenses (property taxes, car repairs). I know I've got to pay property taxes in October, and I'm putting a little money in that envelope now with each paycheck, so that when that big bill comes along, I'm all set. It also works very well for those with irregular incomes -- you can prioritize your expenses, funding the most important envelopes first.

There are a variety of online services and dedicated programs that support the envelope method. I tried out mvelopes.com a while back, but it's expensive and they want to know your banking login information, which I'm a little creeped out about.

I'm taking a look at neobudget.com now -- look for a post in the next week or so.

Moneywell impressions, part 2 - square pegs and round holes

Continuing with my posts on Moneywell...

One of the complications I have with my envelope system is based on the fact that I get bi-weekly paychecks.  (There was an effort a few years ago to move to paychecks on the 1st and 15th of every month, but the union membership shot it down. It seems obvious to me that nobody in the union budgeted their money -- twice-monthly paychecks work sooooo much better).

This bi-weekly paycheck thing complicates my budgeting. Moneywell has a very nifty little spending plan setup to help automate the allocation of salary into buckets, but it doesn't work well for us bi-weekly check folks working in a monthly billing universe.  A small example will demonstrate this:

Let's say you've got a bill that runs $100/month.  Over a year, you're spending $1200.  Us bi-weekly payday folks get 26 paychecks a year.  In theory, I should be setting aside $1200/26 = $46.15 per paycheck to pay this bill. (That is, in fact, what Moneywell will say).

But here's where theory comes crashing into reality.  Let's say I get paid on January 6th and 20th, and the bill's due on January 27th. If I put away my $46.15 after Jan 6 and 20, I only have $92.30 set aside for my $100 bill -- I'm $7.70 short when the bill comes due.  Sure, it'll all work out eventually, but here in the short term I'm hosed.