Proactive Budgeting with Double-Entry Bookkeeping

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.

4 comments:

Adam said...

Another, even more low tech way to do this is to get a series of envelopes or jars and label each for your monthly expenses / savings funds. Each check, cash it out and put the money into the appropriate jar. The drawbacks here are 1) you end up with a lot of cash in your home, which is not entirely safe 2) you end up making several runs to the ATM to withdraw and deposit. On the other hand, you shouldn't need to charge anything to your credit card using this method, and your budgets are much more tangible. You are literally robbing the piggy bank each time you take money out of one of the other funds.

vano said...

HI there Jade,

I have been doing double bookkeeping for myself and my small business for over a year and a half with my own program (I programmed it myself for Mac) after none of the programs out there would do what I wanted to do (believe me I tried practically all of them!) which is forecasting and budgeting and a bunch of other features I wanted and features that I didn't want.

Anyhow, I still was struggling with how to do budgeting based on double bookkeeping, I already had set up a Provisions group account under my Active Assets account and was sending funds from Checking to these Provisions but still couldn't figure out how to manage it all after that, whether to send those funds directly to the expenses, but then my Checking wouldn't reflect the real checking account at the bank, so how?

This has been bugging me for the last few weeks and finally today after a good googling I came across your blog entry. It is still a little bit cumbersome even with my program, but it is a start. Later on I'll try to automate some of the tasks based on this.

Anyway I just wanted to say a big thank you!

Adam Jones said...

Vano - I'm glad you found this article helpful! Like you mention, one of the difficulties of this system is reconciling the account balance on the worksheet with the actual balance in the checking account. In our scenario, I often transfered funds from the checking account to a savings account that had a small rate of return when I moved funds in the worksheet from the checking account to a provision fund, such as birthday. Our banks didn't charge for transfers, so this was a way for me to keep the account balances reconciled. It was a bit cumbersome to maintain all of those accounts, but the extra work was totally worth the peace of mind of knowing that our bills would be covered each month.

San Mah said...

Excellent post, full points to the author

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Jade Mason