In an earlier article, I compared four budgeting apps. This article is the first part of a general guide for using budgeting software to help you get the most out of your app. I start at the beginning (before you have even created an account), and review the initial setup and categorization process. In my next article, I will describe ongoing maintenance.
Pre-setup: Plan categories and decide how to handle past transactions
1. Consider creating your own list of categories
Your software includes a list of predefined categories to simplify expense tracking. While these can be a good starting place, they were not designed for you specifically. At some point, consider customizing the categories to work for you. Some people like to start by using the defaults and then customizing the categories over time. I prefer to change the categories during the setup process. In fact, before creating an account with a client, I like to come up with a list of categories specifically for them.
If you have completed a Sensible financial plan, you could use Sensible’s spending categories:
Consumption
- Food
- Clothing
- Computer & Communications (includes computer-related items, phone, TV & Internet)
- Charitable Giving
- Non-Charitable Gifts
- Health & Medical (includes out-of-pocket medical and medications, NOT health insurance premiums)
- Leisure & Entertainment
- Professional Services (includes accountant, tax prep, attorney, NOT investment management fees)
- Transportation
- Other day-to-day spending
Housing
- Rent/mortgage
- Homeowner’s/renter’s insurance
- Property taxes
- Utilities (includes sewer, water, heat, electric and gas, NOT phone or internet)
- Minor home maintenance (includes exterior maintenance, handyperson/DIY materials, service contracts and interior cleaning)
- Major home maintenance (includes irregular large maintenance expenses such as replacing the roof)
Insurance
Health/Medicare, umbrella, life, disability and long-term care insurance (not homeowner’s/renter’s or auto)
Special expense
Includes anything in Sensible’s “special expense” category. Usually these are large one-time expenses.
Taxes
If you decide to create your own list, then revise your category list based on these questions:
- Will my categories work with my financial plan?
- If you have a financial plan, make sure the categories you plan to use only fit into one of Sensible’s major spending categories (consumption, housing, special expense, insurance and taxes). For example, Sensible includes “Cable TV, Internet and Telephone” in the “consumption” category and “electricity, heat, sewer, and water” in the housing category. So, if you have a general “utilities” category that includes TV, internet and telephone with electricity, heat, sewer and water, that will make it more difficult to compare your spending to your financial plan targets. If you have questions, reach out to your advisor!
- Can I simplify?
- When creating your categories, simplify as much as possible! This will help reduce the time spent trying to remember how to categorize transactions going forward.
- Think about whether adding the extra subcategory will help you make spending decisions. For example, if you had to cut spending and wanted to reduce spending on food, would you want to know how much you spent on groceries versus dining out? If so, add the subcategories for groceries and dining out. If not, just have one food category. Keep in mind that you can always add more categories later if you want more detail.
2. Decide whether to categorize past transactions
If you think you may be overwhelmed by the setup process, I suggest prioritizing customizing the categories and other app features over categorizing past transactions. While you can quickly get a sense of your spending if you review and recategorize transactions over the last few months (or year), you don’t have to do this. You could choose to just categorize transactions going forward and build your spending data over time.
Keep in mind that while not categorizing past transactions saves you time in the initial setup process, you will have to manually categorize or recategorize more transactions in the first few months since the software will take time to learn the categorization rules. If you categorize a few months of past transactions initially, the software will learn some rules as part of the setup process and automatically categorize transactions faster.
It is fairly common to start using a budgeting app and then to abandon it after a few months. Hopefully this guide can help you prepare enough to be successful and continue using the app to help make spending and saving decisions into the future. If you do run into issues, each software provider has customer support that helps answer questions and solve issues. Sensible also has advisors with experience using budgeting software. We are here to answer any questions you may have along the way.
In my next article, I will discuss initializing and connecting your accounts to budgeting software.
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