Thoughts on budgets and bills
I’m here today to talk about budgets. Put simply, budgets are tricky business. In theory they sound quite simple: budget how much you plan to spend and then track how much you actually spend. If this is done for all expenses, it can really help prevent you from spending too much. It should also help you answer several other related questions: Can I afford XYZ? How much do we save every month? How long until I’ve saved $1000? This sounds fine from a broad perspective but when we get to down to an individual’s needs, the devil is in the details.
For example, a monthly time interval is natural period in which to budget because the majority of people’s bills occur at monthly intervals. However, for many other expenses, and for most people, there is no typical month. Your groceries might cost approximately the same amount month to month, but how about paying for your kids’ karate class that they just started taking? Or an odd property tax schedule? Or the fuel pump on your car that needs to be replaced at some unknown point, or a biannual insurance bill, or extra cash for a weekend getaway or… You get the idea. So the big question is, how do you budget for these oddly timed expenses? Some people are big advocates of “envelope budgeting,” while others always try to stay under budget so you have saved cash for the harder-to-plan-for expenses. The other approach, which I think offers the most flexibility, is to use a system that allows you to model for oddly timed expenses through the use of bills and scheduled income. This is the approach that we took in iBank for iPad, where you tell the app about the bills you have and it automatically incorporates those into your budget.
The other nice thing about budgeting for bills, is that it reflects events in our real life (bills) so it is an easy concept for most people to grasp. Of course, not all expenses are bills, so we still need to allow users to budget for things like groceries, gas, dining, entertainment, etc. Even after you’ve budgeted and planned for all of your bills it is still a good idea to keep an active engagement in the monthly budgeting process. That is, budgets change, and should be updated to reflect those changes. Last month when I had a large unexpected car service, I changed my budgeted amount for “auto service” from $0 per month to $750. This in turn forced me to decide where we were going to come up with an additional $750 from within our budget.
The process of budgeting for bills and “unscheduled expenses,” like groceries and gas, works quite well in iBank for iPad. I not only get an overview of what my expenses should be for the month, but I can also see exactly within the month when I need cash for bills. The following screenshot illustrates the predictive power of of the budgeting in iBank for iPad — at the start of each month I know almost exactly how much I’m going to spend and how that is distributed over the month.
The budget section in this screenshot shows that I will spend very close to $3,367 and I have significant bills due in middle of the month.
However, the current implementation of our budgeting system isn’t without some limitations. For example, some people might want to exclude their 401k account from being used in calculating your actual expenses and income because often people don’t want to include their retirement accounts in their budget.
Another limitation is that we don’t preserve your historical changes to scheduled transactions (aka bills). For example, say you set up your cell phone bill for $100/month occurring on the 10th of each month starting in January. Then, a few months later you add a line to the plan and now your bill is $150, so you make the corresponding change in our app. All seems fine, but if you then look back at January, your expected/budgeted amount will say $150. This situation is only an issue if you find value in looking back at historical budgeted vs. actual charts and since we allow the user to see these historical figures, they should be accurate. So a “fix” for this issue is coming in iBank for iPad 1.2. I use the quotes because this isn’t a bug that we were unaware of, but rather we decided this behavior wasn’t critical for v1.0. I also want to point out that introducing the correct behavior was no small feat. Handling the myriad of common cases and edge cases is huge, especially since we need to do it in a way that will support syncing of budgets in a future release. That’s right, syncing of budgets to a future version of iBank for Mac is coming, but it won’t be for a while. And although this is the Developers’ Blog and it wouldn’t feel out of place to discuss in detail why this wasn’t an easy feature to code and implement, take my word for it and see how our competitors handle this situation (hint: they don’t).
In summary, what is the take home point in budgets? First, budgets are tricky because everyone has different ideas about what is helpful and what isn’t. There is no standard model for home finances and budgeting. Second, we believe the best way for users to think about their budget is in terms of bills, scheduled income (e.g. a regular paycheck) and unscheduled monthly expenses, like groceries, gas, entertainment and dining. Third, sweat the granularity and the details, that is, do incorporate that car insurance bill that occurs every six months, do incorporate property tax payments or other bills that might occur at irregular frequencies. Fourth, remain engaged and adjust your budget as needed, especially for the unexpected expenses that inevitably arise. If you do this, you’ll have a very accurate picture of how you’ll spend your money month-to-month and, most importantly, you’ll be able to identify places to save.
In the next blog post I hope to talk more about how we are re-implementing budgets on the Mac to allow for iPad syncing, and I even hope to show some screenshots.