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- “When you plunk down a debit card you have no idea where that money is coming from,” says Fuentes. “Money is no longer tactile, it’s no longer a physical object that you hand over at a cash register, what we’ve lost is the ability to open up our wallets and see how much money we have left.”
- "The first mistake people make is thinking it is going to be hard," says Stephany Kirkpatrick, LearnVest’s senior director of financial planning.
Can your smart phone replace a formal budget or a simple sense of thrift?
Jake Fuentes sure hopes so. Not long after graduating from Stanford, he went out for dinner and overpriced drinks with friends, paid with his debit card, and was unpleasantly surprised a few days later by a $35 Bank of America overdraft fee. So last year -- backed by $5 million in venture funding from VC firm Kleiner Perkins, former Citigroup CEO Sandy Weil and former FCC Chairman Reed Hundt -- the now 27 year-old Fuentes launched Level, an iPhone and Android app that functions as a mobile spending scold.
You enter the amount you have available to spend each month, subtract bills and savings goals and then provide the account numbers and sign ins for your debit and credit cards accounts to Level. It securely aggregates your spending, shows your remaining spendable cash for the day, week and month and reminds you when your spending is trending over budget with a nasty negative sign. It’s a bit like a Fitbit that tracks the number of steps a wearer takes as a way to reflect overall fitness (and to remind him/her to get up and move more).
According to The Nilson Report, a payments industry newsletter, people in the U.S. with at least one credit card have an average of 6.8. Increasingly, even routine monthly bills—for newspapers, Netflix and even your electric bill---are automatically debited from your checking account or charged to a piece of plastic. All that makes the idea of balancing a checkbook, or even controlling spending by putting a set amount of cash in your wallet each week, an anachronism.
So what’s the best 21st century, smartphone-friendly method for controlling your spending? Countless apps and sites promise to get your financial life in order. Which one might work for you is largely a matter of taste. Do you want to make a formal budget to analyze exactly where your money goes or are you simply trying to live within your means?
Level, for example, doesn’t really help you analyze your expenses -- you can see each transaction but the app doesn’t break them down by category. It doesn’t matter whether you used your debit card at Costco to stack up on basics or your credit card at a fancy restaurant, blowing your dining budget. Spending is spending.
“While spending less than you make is not the only financial problem people have, it is the primary one,” says Fuentes. “If you can solve that then a lot of other things will take care of themselves.”
"The first mistake people make is thinking it is going to be hard," says Stephany Kirkpatrick, LearnVest’s senior director of financial planning. A budget, she says, provides freedom if you remember that it is about progress not perfection. If you know where you stand financially you can spend with confidence.
Tools Mint and LearnVest aggregate the transactions on your debit and credit cards allowing you to file them into personalized folders and track spending trends. SaveUp creates saving and financial education incentives by allowing you to compete with other users and win prizes. Other sites allow you to print out templates to cut some of the organizational work off the top.
Like Fuentes, Kirkpatrick wants you to be able to pull out your cellphone and get a clear snapshot of whether you can afford the steak or if you should stick with a salad. But she says "the devil is in the details." She argues that to truly understand your spending -- and to change bad habits -- you need to data mine.
For example, you might know intuitively that you spend a sizable portion of your take home on dining out. But did you realize that you are spending $30 a week on those trays of sushi you grab for lunch at the corner grocer? The sushi isn't even that good. By occasionally digging through breakout folders, like those used in LearnVest's budgeting tool, you can spot such money leaks and make informed decisions about whether to cut them off . Maybe now you'll brown bag it and put that $30 toward brunch with friends, savings or something else you value.
In other words, Level falls on the anti-budget side of a long standing debate among financial planners about how to track your spending, while LearnVest is on the long-term, detail minded end of the spectrum.
Last summer a Wall Street Journal story summed up the two sides this way:
Should people make an ongoing habit of tracking everything they spend and save? Or should they do shorter, focused programs of budgeting and reflecting to spark a change in spending behavior? The long-termers say that ongoing tracking, like stepping on the scale each morning, provides a crucial reality check, ensuring that savers stay on course for certain goals. The short-termers argue that people tend to fall off the wagon of long-term tracking. So, it's better to give people manageable short-term goals that they can actually accomplish, which can lead to insight that they'll incorporate into their lives.”
Digital tools that live in your pocket and automatically pull in transactions put the debate in stark contrast. In reality, we have been having this conversation with ourselves since the days of pen and paper. And for some the old fashioned way is still best.
Nicole Lapin, author of Rich Bitch a personal finance book due out next year, falls somewhere between Fuentes and Kirkpatrick. She recommends starting by looking at “every little thing.” Once you understand your weak spots and habits, she advocates analog tricks to keep in control. Lapin organizes her financial documents in zebra print folders. “Use a pink colored pencil if you want,” she says, “keep it fun.”
She also recommends setting aside 5% to 10% of your budget as fun money. “Traditional financial experts may say to ditch a latte to get your budget in order. I say that’s hogwash. Allow yourself small indulgences; it will keep you from binging later on, just account for it.”
Keep yourself responsible by taking out the exact amount of fun money you can spend in cash. Maybe “you want to buy that latte or to take a yoga class, it’s your fun money, you get to decide how to spend it,” she says. “Once the cash is over the party is over.”
How do you keep your spending in check? Tell us in the comment section or tweet @samsharf.
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