There are many strategies out there that aim to create the perfect household budget. They generally offer help to build, manage, track, and maintain your budget utilizing spreadsheets or complicated software. This can be a good route for number crunchers who want a detailed breakdown of every little expense, but the simple strategy I’m going to lay out doesn’t aim to make you the bookkeeper of your finances. Instead, it aims to make you the CFO.
The distinction between bookkeeper and CFO is important because it demonstrates the need for oversight that leads to action, in addition to record-keeping and visibility. The four steps outlined below create a system to gain insight on the accounts expenses are being pulled from, tracking by dollars spent versus dollars left to spend, establish a household budget, and implement proactive monthly check-ins.
Consolidation Is Key
A cluttered financial snapshot is always more difficult to deal with than one where each account has a clearly defined role. However, it’s understandable for a family to have a couple extra accounts from before the marriage or even due to some amazing new customer specials that made it tempting to open more accounts for free money. Regardless of how the checking or savings accounts were opened, it’s time to consolidate and make life easy again.
In a perfect world, all you would need is one checking account in which all of the household income flows into and out of. This provides clear visibility of the entire budget, whether you’re single or married. Once this account is set up, all your fixed expenses (such as rent/mortgage, utilities, cable bill, etc.) that aren’t paid on a credit card and don’t fluctuate much should all be paid through this one visible account.
If you’re married and prefer to have some privacy in regards to the items you purchase, then there is another option. Some may prefer to have one household account and two individual accounts where only their respective personal spending would come from. These would be things like one spouse’s round of golf and the other’s dinner out with friends. There should generally be a mutually agreed upon amount each spouse has in their personal account each month to spend on whatever they prefer with no oversight from the other spouse. This allowance, so to speak, will need to be included separately in your budget as a fixed expense.
Watch Your Variable Expenses Build
Once you’ve established a household checking account, you should have a clear understanding of the fixed expenses flowing in and out of the account each month, but what about every other expense under the sun? I’ve found putting these expenses on a single household credit card is the best approach, as long as it’s paid off every month in full.
This may sound counter-intuitive so hear me out. The psychology of looking at what is due on your credit card go up tends to be more engaging than watching your checking account go down. It changes the thought process from “my checking account is at X so I have $400 left to spend” to “wow, I’ve already spent $600 this month.” Since the amount in your checking account is always going to be changing, it ends up being a poor tool for tracking. This is particularly true if your income increases and you have already built a habit of spending down to a certain amount, resulting in lifestyle creep.
Using a credit card instead of a debit card gives you the possibility of accumulating rewards. There are plenty of different offerings out there to get points or miles to use towards flights, hotels, gift cards or just plain cash back. A great place to start looking for the right credit card for your situation is CreditCards.com, which lists out the benefits of each card so you can find the one to best fit your needs or wants. A credit card also helps build your credit when you consistently pay off your balances on time.
There is also some fraud protection built into making purchases with credit cards. With a debit card, the burden is on you to provide proof that charges are truly fraudulent. With a credit card, the card issuer must fight to get its money back.
Create a Snapshot of Your Household Budget
This is everyone’s favorite part, right? There are tons of tools available these days to construct a budget for your household. It can be a simple handwritten budget, a detailed spreadsheet, or a program such as Mint, Personal Capital, Budget Simple, etc. Your budget needs to have a clear delineation between fixed expenses and variable expenses. It does not need to be an exact construct of every last thing you spend money on but rather a guideline for where you should be landing each month.
We can assume the fixed expenses should be easy to keep track of month-after-month given that these expenses should not vary much. By reviewing past bills and statements, you should be able to budget for fixed expenses each month. However, the variable expenses tend to be more complicated as they can change dramatically from month-to-month. To keep track of these, I suggest using general categories versus detailing out each expense.
For example, Mint tracks general expense categories with detailed sub-categories. I find the extra effort to build out and maintain these sub categories doesn’t equate to a more effective budget. Remember, we are not trying to be the bookkeeper here. Instead, we just need the general buckets to determine where spending is occurring and take action to correct potential overspending in each. The goal is to determine where spending take place so you can track where you actually are throughout the month.
Schedule a Time Twice a Month to Check Your Progress
It’s important to have accountability when you’re trying to adopt the habit of budgeting. Once you have a consolidated view for your variable spending on one credit card, you need to keep track of spending and be proactive in your approach to changing your spending habits. I recommend calling your credit card company to change your billing statement date to the first of the month. This way, at any given time, you can log in and view your balance “Since Last Statement” to see exactly what you have spent during the month. This will help determine how you are doing throughout the month relative to your compiled budget.
To be proactive, you should schedule a time to sit down and review your monthly progress relative to your budget on the 15th of the month and again at the end of the month. If you only check in with your budget at the end of each month, you end up in a reactive state. Instead, the idea here is to see where you are at throughout the month so you can proactively make changes in your behavior, as needed.
For example, say your variable spending budget is $2,000 per month and you’ve spent $1,500 halfway through the month. This should signal that you may need to tighten your belt a bit for the remainder of the month. On the other hand, if you have a little extra room in the budget that month, you can use that money to plan ahead for future expenses, such as an upcoming trip or other large expenses, ultimately reducing the potential for big swings in spending.
There will always be unexpected expenses from time to time, but utilizing this strategy will help you proactively manage your budget and smooth out spending over time. This is important because once we have a general understanding of where spending should fall, we can set savings goals and avoid things like lifestyle creep when income starts to rise. It will also help when you decide to start planning for retirement because most retirement income analysis will need a reliable estimate of household spending.
Good luck becoming your own CFO, and happy budgeting!
This article is the second of a three-part series on budgeting with Stephen Nelson. Read the first article on why you need a budget here.