I am a nut about maintaining a budget in our house, and even more so now that we are planning to build a new home. I've used tools in the past, such as Microsoft Money, that allow me to tracker where the money went and to get an idea of what my regular expenses are. The problem I have with these tools is that they are reactive. They are only useful to me after I have spent my cash, not before. In my opinion, systems that give you a postmortem on your finances are not really useful. I want to feel the pain before I spend, not after. If I feel pain before, I have a chance to avoid spending at all, thus alleviating the pain of deviating from our budget (and potentially running into debt).
The system that I've come to use is decidedly low tech, but very effective. Using Google Docs I created a spreadsheet and added worksheets for all of our regular expenses, both monthly and annually. There are additional worksheets for our accounts: credit, checking, savings, loans, etc. Finally, there are worksheets for each of the things we would like to save for throughout the year. I use these worksheets to perform double-entry bookkeeping. Here is the full list of worksheets:
- Checking
- Savings
- Credit Card
- Television
- Internet
- Food & Gas
- Electricity
- Water
- Sewage
- Phones
- Trash
- Car Payment
- Mortgage Payment
- Life Insurance
- Car Insurance
- Plates and Tags
- Christmas Fund
- Birthday Fund
- Personal Allowances
- Slush Fund
Most of these accounts are self-explanatory, and the budget for each is fairly easy to gauge. We spend a set amount each month on television, internet, water, and sewage. Others are annual or semi-annual expense, such as insurance or plates and tags for our vehicles. The birthday and Christmas funds represent how much money we would like to spend for each of these events. Finally, the slush fund is just that, a pool of money for any unexpected, irregular, or one-time expenses.
So how does this double-entry bookkeeping work? I get paid twice a month, which means I get 24 paychecks in a year. Out of that paycheck I need to fund each of the accounts listed above such that, when the bill comes due, there is enough money in the account to pay the bill. Take the mortgage payment. Each time I receive a check, I initially enter the full amount in my checking account, but then I move those funds into the other worksheets to cover expenses. Let's say our mortgage payment is $800. That would mean that on each check I receive I need to 'transfer' $400 from the checking worksheet into the mortgage payment worksheet. On my second check of the month I transfer another $400 from checking to mortgage payment. Since it is the end of the month, my mortgage payment is due, so I transfer $800 from the mortgage payment worksheet back to the checking worksheet, and now I have enough money in checking to cover the check to my lender.
In doing this, I don't actually have a true account with a bank for each of these worksheets. In reality, all of the money from each of the worksheets just stays in checking. However, each time I am looking to spend money, I have to make a conscious decision to take money out of one fund in order to supply another. In this way, this budgeting system is proactive. If we want to go to a movie or I want to buy the latest gadget I have to take money out of a fund. If I want to buy a new gadget, but my personal allowance is depleted, I have to decide which other account I want to take money from to fund it. Do I spend less on food this month? Do I reduce the amount we'll be able to spend on birthday and Christmas gifts? It really forces me to consider how badly I need whatever it is I'm going to buy before going out and spending the money.
It would be very easy to ruin this system by simply putting everything on a credit card. A credit card is just another account, though. We treat spending on the credit card just like writing a check: we have to 'fund' the card prior to charging anything to it. If we go to the grocery store and spend $100 on groceries we transfer $100 from the food and gas budget to the credit card budget. This way, when the bill comes due at the end of the month for the credit card, we know that we can transfer the money from the credit card worksheet to the checking worksheet and have enough money to cover the bill.
I really like this system of budgeting. Knowing what budgets I'm taking from before I spend money is a huge advantage over trying to recover after the fact. There are some drawbacks. It is cumbersome to manage all of the worksheets. Money that sits in checking could be doing us a lot more good in a savings account earning at least a little interest. In my opinion, the benefits greatly outweigh the drawbacks. We no longer fear opening the credit card bill at the end of the month, or scramble to find money for birthday gifts. We know ahead of time that we will be able to cover our expenses, and can feel confident about affording a luxury expense when we decide we deserve one.