If we spend $500 for groceries each month and can't possibly lower the total, then it's foolish to budget $450. Budgets must be based on reality, which is why I recommend keeping track of all expenses for at least three months before drawing up a budget.
With more discretionary expenses, flexibility is possible and essential. Say we allow $100 a month for eating out, and one month we spend $50. Like rollover minutes in a cell phone plan, we now have a reserve we can spend the next month.
But if we also budgeted $100 for going to the movies and spent $150, we'd be wise to count the $50 reserve for eating out and come out even.
Also, if we have a $300 car insurance premium due in six months, it's smart to set aside $50 every month for it. It's also smart to budget monthly savings toward long-term goals, including retirement.
These are all basic budgeting principles, the foundation of financial success. So I am pleased that, to varying degrees, these ideas are at the core of the 2008 versions of two popular personal finance software programs, Quicken and Microsoft Money.
Provided that you are computer literate and that you have an Internet connection, it's quicker and easier than ever to use these programs to set up a realistic budget and save money. While both also offer highly sophisticated investment and tax-related features, the recent and welcome trend has been back to the basics.
"Clearly, many people are living beyond their means. ... Our concern this year is about saving money," said Jim Del Favero, senior Quicken Group product manager. Quicken's main competitor, Microsoft Money, is promoting its new Money Plus with access to information about coming bills, account balances, spending and cash flow from the computer's desktop, without having to open the program.
"Everyone is busy these days, and sometimes you just need to know your account balance or check out whether you have enough extra cash" to splurge on something you like, said Chris Jolley, group manager of the financial products group at Microsoft Corp.
I consider both programs excellent with the caveat that they are not for computer novices and that learning all the features can take hours, if not days. But then, you may just want the basic versions. Product details are available at www.quicken.com and www.microsoft.com/money.
One more caveat: To save time, both programs download information from financial institutions' Web sites and assign categories to transactions. For example, an expenditure at a grocery store is assumed to be for groceries, even if you bought a DVD. If you want complete and totally accurate information, you'll have to enter at least some transactions yourself, particularly if you buy a lot of things with cash. I prefer to enter all my transactions by hand.
I find Quicken easier to use, possibly because of familiarity. (I've used it for almost 20 years.) I also prefer Quicken's approach to savings, focusing on discretionary expenses as areas where we can make a difference and including the concept of rollover reserves.
Microsoft Money recommends limiting "committed" expenses to about 60 percent of gross income and tracks whether you're meeting that goal. In this context, committed expenses include anything from the mortgage to music lessons you are committed to giving your children.
While focusing on the big picture to prevent overspending is practical advice, I disagree with the contention by Microsoft Money advisers that tracking what you spend in specific categories is not that important. To me, it's everything.
Humberto Cruz writes for Tribune Media Services.