How Budgeting Works
The purpose of a budget is to answer simple questions: how much money did I save last month? Do I have enough money to make this purchase? Answering these is simple in an ideal world, but the complexity of real life sometimes makes it hard to see clearly.
There are many approaches to budgeting. Some of the approaches that seem simple at first end up causing more work to keep an accurate budget, or make it easy for hidden expenses to drain your savings.
We find the best way to track your money is rooted in something called envelope budgeting. Instead of predicting how much you'll make and spend and trying to reconcile that with what actually happened, envelope budgeting embraces real income as the source of your budget instead. This means you can only budget money that you already have.
You can think of categories as little funds that you deposit money into. Combined with our rollover system, it provides an intuitive way to handle a lot of things that come up in life. And you know it's always accurately depicting your finances — there's no made up numbers.
Like the tactile feedback of a vibration under your finger, this system tells you when things are right or wrong and provides easy ways to fix it.
Creating a budget
If you are creating a budget for the first time, here's how that works:
- Your total account balance is available to budget. It knows how much cash you have currently, and that is all you can currently budget. (Remember, your budget is always based on your current money!)
- Click on the budgeted column of a category and enter a number for what you think you'll spend that month. Tip: don't overthink it. You can always adjust it later.
- Continue to budget until the To budget amount is 0.
- You can also customize the categories.
The budgeting workflow
Here's the important part: your budget is not static. It's not something you set and forget. Maybe you check in and realize your food budget is busted because you hosted a dinner party. No problem — just move money from somewhere else to cover it.
Maybe when the next month starts, you see that your budget didn't really work. Make a new budget based off what you learned!
At a high-level, using the budget looks like this:
- Every so often, import new transactions and categorize them.
- Check your budget. If you've already overspent somewhere, you can move money from another category to cover it, or you can wait to cover it next month.
- If there's any new income, either add it to your current budget or (most likely) hold it for next month.
- At the end of the month, create a new budget for next month. Usually, you will use income available from last month to cover the new budget. You will quickly see how much you saved by seeing the leftover To budget amount after budgeting for the new month.
- Move your leftover saved amount into something like a savings category or anything you are saving up for.
How money rolls over
When you add income for a month, it becomes immediately available to budget. You will see it in the Available Funds number at the top of the month. If you don't budget it for this month, it will roll over to the next month and appear in the same Available Funds number for that month. You can hover over that number and a popup will show which income came from previous months and the current month.
Most likely, a common workflow will be to "hold" income you make this month for next month's budget. Optionally, to hold money instead of budgeting it for a month:
- Click the To Budget amount.
- Select Hold for next month in the menu.
- Press to hold all available money, or enter a custom amount to hold.Enter
This doesn't do anything except takes out money from the To Budget amount for that month, allowing you to "zero it out" and mark it to be used for later. That money will appear in next month's To Budget.
Using Hold for Next Month will ensure that the funds are no longer available to budget in the current month but can still be allocated to the budget in any subsequent month. This will be particularly useful for those who are looking to stop living paycheck to paycheck and instead gradually get one month ahead i.e. living on last month’s income rather than this month’s.
You can also just leave the To Budget amount alone.
It is possible to hold money multiple months ahead. If you do this, those dollars will be delay to be budgeted until the last month of the hold. If you need to use that money in the current month to cover over spending, use the Reset Next Months Buffer button to bring that money to the current month. This needs to be done for each month there is a hold.
If you enter a new month and have a negative "To Be Budgeted" amount and you're sure it should be positive, try resetting next month's buffer to bring money that may be held back to the current month.
When you overspend in a category, that needs to rollover as well. You spent money that wasn't budgeted, so now you need to go back and take it out from somewhere. Doing this keeps your budget intact.
One way to do this would be to simply roll it over into next month's budget for that category, subtracting it from the available amount. This hardly ever works in real life — if you have a food budget it's highly unlikely you'll be able go under it next month just because you overspent.
Usually you have a couple places that you draw money from to cover overspending. To make it easy, all overspending is automatically taken out of next month's To budget amount, and category balances are reset to zero. This makes it easy to make up for it by reducing your budget in some other category (like savings).
If there is money leftover in a category at the end of a month, it simply rolls over into the category's balance next month.
Working with the budget
Moving money around
You can move money between categories, as well as between the To budget amount and categories.
- Click an amount in the Balance column for a category.
- Select Transfer to another category.
- Enter an amount you would like move, select the target category (or To budget), and click Transfer.
- Your budget will be updated with the new amounts.
You can also click the To budget amount and transfer to a category.
Creating new budgets for the next month
You need to create a new budget each time a new month begins. It wouldn't make sense for categories to be budgeted for that month already since cash needs to come from somewhere. Hopefully, by the time a new month rolls around you've got enough income from last month to create another budget month:
- One option is to go through all of the Budgeted amounts and enter amounts again.
- To speed this up, use budget shortcuts. Click the 3-dot menu in the top-right of a budget month and select Copy last month's budget to use the same budget as last month.
- Other options in the menu will fill in the budget with various amounts.
Rollover negative category balances
Sometimes you want to keep a negative balance in a category across months. The most common reason is to keep track of reimbursable expenses.
- Click an amount in the Balance column for a category.
- Select Rollover overspending
- For all future months, a negative balance will stay in the category
Recommended workflow for new users
This might sound complex, but it's really not! You can get as detailed as you want, but it's still very effective if you keep it simple. If you're not sure where to start, we recommend this simple workflow:
- We recommend opening a savings account if you don't have one. Add it in Actual as an off-budget account.
- Stick with the basic categories (you will probably add a few more, but don't overdo it).
- Try to budget less than what you are making so that you are saving money each month.
- When the month ends, copy last month's budget. Whatever is leftover in To budget is the amount of money that you saved.
- Note that this automatically will cover overspending from last month by taking it out of the leftover To budget amount. You're effectively taking out of savings.
- Budget the leftover To budget amount to the Savings category
- Transfer the leftover amount to your savings account and categorize the transactions with the Savings category
If you don't have a savings account, you can simply skip step 7. The Savings category will build up a balance and represent the savings that you are keeping in your account.
This also assumes you have enough income to cover a full month plus any overspending. If you don't, you need to watch your budget more carefully and make sure to cover overspending from other categories.