Budgeting Wisely

I love creating budgets. I update ours every few months when there’s a shift in our income or a new thing to save for, and even though it’s hard work, I enjoy it. I enjoy it so much, that I jump at the chance whenever a friend says they need help spending less than they earn.

We have a total of thirteen accounts at two different credit unions, each account for a different purpose (one for bills, one for one type of savings, one for one person’s spending, etc.). That may be extreme, but I’ve found that by not co-mingling money in just a few accounts, it’s easy to never spend money that has been reserved for another purpose, like our annual car insurance bill. Before I got married, I had seven accounts. The accounts grew with our marriage. When we get paid, the money is immediately divided into the different accounts according to our budget. It works for us.

Here’s the rundown:
Savings Accounts
Household expenses
Car insurance, repair, and replacement
Emergency fund (easily accessible half)
Summer savings (I get paid ten quadriweekly checks, so I have to save a chunk of each check to get through three pay periods of no pay)
My savings
My husband’s savings
My checking
My husband’s checking
Our checking (for paying bills)
Generic savings (where paychecks are deposited and transferred from)
Generic checking (used to transfer funds between credit unions as needed)
Emergency fund (the half in a CD account)

Before I share our actual budget, I want to share the philosophy behind our decisions. I don’t think our budgeting model would be perfect for everyone, but maybe it will spark a conversation about what you care about and how you can make your budget reflect that.

Also, it’s worth noting that we’re a two-income household with no kids, so we have more of our income to spare than families with kids.

I make significantly more than my husband does, but you’ll notice that when it comes to our personal savings and spending accounts, we get the same each month. We both work equally hard, and our income is our income. All that money goes into a pool and is divided into the various accounts that pay our bills and build our savings. The only “mine” and “his” happens in our personal savings and expense accounts, where the amounts we receive are equal and we can budget (or not) as our hearts desire and our frivolous spending cannot hurt the other or put our bills and household savings in danger.

This frees us from having to get approval before spending or being surprised when our shared checking account is low (we do not, in fact, ever use the same checking account — our respective debit cards are linked to totally different credit unions). It also frees us from any bitterness that may arise if one of us were to have more spending or savings than the other due to something as arbitrary as our hourly wage or salary.

My husband is the type who spends money immediately upon receiving it. He’s gotten more control over his spending in recent years, but spending is his first impulse. He is comfortable letting his balance go down to zero.

I am the type who would rather skip a meal (or two or three…) than violate my budget’s rules, and I somewhat obsessively need to have a savings buffer.

Clearly, if we shared a spending account, we would probably be paying for couples’ counseling.

But separating the spending accounts, it turned out, wasn’t enough. When we first got married, we budgeted on a quadriweekly schedule (I get paid every four weeks, my husband every two). We each got our quadriweekly spending allowance, and mine would last the entire time, and his would last the week. He worked at it and did improve, but it just wasn’t easy for him like it was for me, so we switched to paying his allowance every other week. That was better, but he was still struggling by the second week. Finally, we switched to paying his allowance once a week, and all is good. Mine still comes once every four weeks because that fits my spending personality.

Okay, this may be a weird one, but it’s important. My husband’s weakness is that he spends without thinking. My weakness is that I worry so much about the future, I can save and forego enjoyment now. This could be a recipe for disaster in a marriage, but we’ve learned to appreciate each others’ weaknesses as strengths.

Here’s what I mean: My husband’s spending habits make him the most generous and fun person I know. He doesn’t hesitate before buying a thoughtful gift for someone or treating a friend to lunch. He inspires me to not worry so much about money and remember to have fun with the people I care about now. If he became obsessed with saving or retirement or paying down the mortgage like I am, we would both be miserable.

My spending (or, rather, saving) habits are the complete opposite. I make sure the bills are paid, our emergency fund is full, and that we’re constantly saving for big things like vacations or home repair/upgrades. That may make me a bit less spontaneous, but my husband appreciates the stability my habits provide for us. When something big comes up, he’s relieved to know that I’ve probably anticipated it and have it covered and, if not, that I can whip together a budget that will make it okay.

When I was in college, my parents were struggling financially. I had saved enough money that I always had enough for my next semester of school and books… barely. Then my parents needed help paying their mortgage. If I’d been living at home, that would have been one thing, but I had my own rent and living expenses and tuition to worry about, and I knew that even though they said they’d pay me back in time for next semester’s tuition, they might not be able to.

I loaned them the money, and they didn’t pay it back on time. Back then, interest rates were great, and, so long as my savings were intact, I made enough on my tuition account to pay for books, so I was not only out tuition money, but I was out my book money as well. I hunkered down and ate one or two small meals a day. I cut out all entertainment. I worked extra hours. I managed to pay my tuition, and, slowly, my parents paid me back.

What I hated out of that experience was the bitterness I felt towards my parents whom I love and respect and appreciate for everything. I knew school was my only way out of poverty, and risking my ability to continue school terrified me. I decided then and there that I would never loan money again and expect it back. Every loan I make now is a gift. The money is out of my hands, and I don’t expect it to return. If it does, it’s a pleasant surprise.

Thus began the Bank of Mezzie. Just about all my family and a good chunk of my friends have “borrowed” from it at some point, and very few have ever paid me back. If they’re so down on their luck that they have to ask for help, how could they? Calling such gifts a loan makes them feel better about taking the money, but I do make it clear that I never expect to be paid back and that our relationship will in no way change if they can’t pay me back. I’ve yet to have a strained relationship with anyone since I began that rule. I never “lend” what I can’t afford to give, but the fact is — once our bills are paid, everything we have is something we can share with our friends and family in need. The economic crash hit some people harder than it did us, and we are happy to share.

As far as formal charitable donations go, I pay from my personal savings and expense accounts as well as from extra money from hourly work or stipends. The amount I formally give can range from the equivalent of 3-10% of our net income (remember, some of that is unbudgeted money, so it may add up to more than 100% — this is English teacher math) and ranges in causes from emergency relief to homeless shelters to arts.

I’m going to share mine, but with percentages rather than dollar amounts. I am a public employee, so if you put together all the clues on this blog, you could figure out my income and then extrapolate my husband’s from the percentages I give here, but I’m just going to trust that no one has that much time on their hands.

All percentages here are of our net income. Our taxes, retirement savings, pension contributions, health care subscription costs, and union dues are all taken out of our checks, so the percentage of those isn’t included in this budget. For the record, we do not quite contribute the maximum we can into our retirement, but have been gradually increasing the amount each year and should hit that maximum next school year.

I call it a conservative net income because I only include the money we’re sure to take home unless one of us gets laid off. I don’t include money from bonuses, overtime, or extra work (like the stipend I get for being department head or summer school). We deserve fun money for extra work or work of such quality that it warranted a bonus (teachers don’t get bonuses, but my husband does sometimes). We can use that money for frivolous things or save it for something big. I’m using my department head money and summer school money from the last year to landscape our front yard, replace a wall, and replace our gates, for example. More importantly, not budgeting for that extra money means that we don’t have to do that extra work. I won’t be teaching summer school this year; instead, I’ll be volunteering my time to help the union and running summer bridge sessions for incoming students. I wouldn’t have the freedom to make that decision if I’d budgeted for summer school.

Our debt used to only be our mortgage, and then someone did a hit and run on my husband’s parked car and totaled it. Now we also have a modest car payment with an incredibly low interest rate from our credit union.

Car Payment: 2% of net income
New cars aren’t the best investment, but we like the car my husband got, so all is well. My car was purchased new as well, but I got an incredible deal; now a new car of the same model as mine costs over $10,000 more than what I paid when it was an introductory model and the market had just crashed. Inflation hasn’t gone up nearly as much as the cost of my little car, so I definitely got a good deal. It’s not likely to happen again, so when my car dies, I’ll get a used car.

I wish I could just rely on the bus, but walking is still an issue for me.

Mortgage Payment: 40% of net income
Okay — before you freak out and say that’s too high, let me say a few things:

1. Our mortgage payment includes escrow, property taxes, PMI, house insurance, and a voluntary extra monthly principal payment.
2. Our required mortgage payment is only 32% of our net income, including the PMI. Yes, that is still high. It is below the suggested 25% of our gross income, though.
3. We are paying ahead aggressively to get rid of the annoying PMI payment. After it’s gone, our required payment will be 29% of our net income (probably a bit lower since we’re both getting raises this year).
4. We’ll continue paying ahead because we don’t want to have a mortgage payment when we retire. We may not always pay ahead quite so much once the PMI is gone, but neither of us wants to wait 27 more years before retiring. Right now we’ve had the house 3 years but have paid 6.8 years; our PMI is supposed to drop off at about 7.5 years per our amortization schedule, so we’ll be there about 3.75 years early. That saves us just a hair less in PMI payments for 3.75 years than we will have been adding to our principal for 3.75 years. After 7.5 years, we’ll have spent about the same amount as what we would have spent anyway, but we’ll be years ahead on our payments. If we keep putting what is currently 40% of our net into our mortgage (more and more going into the principal because that PMI is gone), we’ll pay off the house shortly after my husband retires and right about when I do. As long as we’re able to max out our retirement contributions and pay ahead, we’re fine. If not, then retirement contributions come first. Housing costs will rise while our mortgage payment stays stable, so if we have to choose between one or the other, choosing saving for retirement makes the most sense.
5. Our extra payments are optional. If necessary, we can rebudget without them and use that money for some currently unforseen expense.
6. Our actual mortgage cost (not counting the extras) is equal to or less than the rent of some apartments in our area.

Remember, this doesn’t include the pre-tax retirement contributions that are deducted each month from our checks.

Emergency savings: 6% of net income
We can live somewhat uncomfortably for six months on our emergency savings. We add a little bit monthly so that, ideally, we’ll also have some money stashed away for emergency repairs in addition to our six month stash. Interest rates are awful right now, so half of it is in a short term CD so that it makes more than a few cents a year (though it still only adds up to a few dollars). Once it gets to an amount where I think we can afford the pipes bursting and float for a few months if one or both of us gets laid off, we’ll start investing the amount we currently add monthly.

Medical savings: 1.5% of net income
This is to cover copays for hospital visits, medicine not covered by our insurance (I paid $231 for 30 pills I couldn’t take more than two of because it made me so ill!), and other health-related costs. In retrospect, I should have used this account to pay for my mobility scooter, but I used my personal savings.

My personal savings: 3% of net income
My husband’s personal savings: 3% of net income
We both have very different spending habits, so our balances are not even close even though we contribute the same amount each month. We can use this money for whatever we want, but since it’s in separate accounts at a different credit union than the one we pay our mortgage and bills from, it mostly just sits there until we decide we want something that costs more than our spending money will let us buy. For me, it’s usually a travel expense. For my husband, it’s usually something music-related.

Household repair, upgrades, and vacation: 4% of net income
This is a bit of a hodge-podge account. Basically, it’s an account for things we both agree we want or need. This year, it’s helping pay for that landscaping project I mentioned. Lately we’ve used it to buy LED bulbs, a toilet flush replacement kit, a composter, and a door stopper. It usually has a decent balance, but it will be wiped out this year due to our extensive upgrades.

Car insurance, repair, and replacement: 4% of net income
We pay into this account monthly so our annual insurance bills and semi-annual repairs/maintenance don’t destroy our budget. We pay more than we need into the account so that down the line we won’t have to take out a big loan for a replacement car when ours die. Unfortunately, the life of my husband’s car that easily had another ten or fifteen years in it was cut short before we’d saved enough to fully fund another.

Household expenses: 15% of net income
This includes utilities, cell phones, internet, gym memberships, and streaming services. It seems really high to me, so I’m going to look into why this week.

Husband’s expenses: 10.5% of net income
My expenses: 10% of net income
This includes gas, groceries, and entertainment. My husband gets a slightly bigger budget because he drives further to work and usually drives when we’re both together.

We have work schedules that allow us few meals together, so, while we do go grocery shopping together, we buy our food separately. When we do have dinner together, we tend to alternate cooking for each other (though my husband is the better chef, so in practice he does that more). We also have different eating habits, so it makes sense to buy our food separately since we’re likely to want to eat completely different things for breakfast and lunch. (You’ll never catch me eating steak for breakfast, and you’ll never catch him eating yogurt and fruit).

Breakdown of my expense account
Of my 10%, 5.5% is budgeted for groceries (including my local farm deliveries), 2.5% is budgeted for transportation (gas and a pass for local transit), 1% is budgeted for other personal expenses like clothes, and 1% is budgeted for entertainment. Since I rarely spend all of my grocery or transit money, I put the remainder into personal entertainment and emergency funds. I consider eating out entertainment.

I haven’t the slightest idea how my husband breaks down his spending.

I think Dave Ramsey stole some ideas from me. For most of my monthly spending, I use a cash envelope system with envelopes labeled:

Entertainment Surplus

When I have leftover cash, it gets split equally into those last two envelopes. The entertainment surplus envelope allowed me to splurge when a friend from out of town stayed with us recently. The emergency one recently came in handy when my podiatrist said I needed new shoes but I’d just spent my clothes budget on some nice shirts for work.

It works for me, and it has since I was about four when I first started separating my allowance into spending (out of the piggy bank) and saving (in the piggy bank) stashes. Even then, I saved about two-thirds of my income, and that was when I had an allowance of 25-50 cents! I switched to an envelope system for my spending money and opened a savings account when my allowance started coming in bills. Basically, I’ve been using this system since I could count.

I use loose change for taking the bus during months that I’m not going to use the bus enough to warrant purchasing a pass. When my loose change container (a repurposed Nalgene bottle) gets full, I cash it in and give myself some frivolous spending money. Last year I spent it all on fountain pens. This year I’m going to use it to give my husband a massage gift certificate.

I am addicted to learning, and my tuition, private classes, and/or supplemental materials come out of my savings for now. If I decide to get a second masters, We may have to stop paying ahead on the mortgage. While I’m injured, sit-down type work like a masters degree makes sense. I’m thinking about it.

Clearly, I think budgets are important. I truly believe that a well-thought out and adhered-to budget can save on all sorts of stress and help people avoid excessive consumer debt.

That said, I do not think that people in financial trouble are to blame for their position. First off, we no longer teach personal finance in public schools. More importantly, in the U.S. right now there is disturbing income inequality. Couples are working more and more hours and still not getting the spending power they would have had for just one person working full time in, say, the 50s or even the 80s. The system is broken, and it’s going to reach my family as teacher tenure and job protections are slowly stripped away and it becomes easier to fire the most expensive teachers for no reason at all. No budget can adequately plan for such things. No one should feel ashamed because they’ve been laid off or they have a minimum wage job (or two) that can’t make ends meet and they’ve had to turn to credit to survive. A hospital bill or an accident can change a person’s financial standing overnight, and that is wrong . I know that I have been lucky and that my luck is temporary, and this sharing of my budget is not supposed to make anyone feel bad.

It is, hopefully, going to help people think about where their money is going and what changes they might make to meet their needs and goals as best they can in their given situation.

Meanwhile, we should all demand a system that protects citizens when things go bad for them instead of giving gifts to banks who committed fraud and gambled with our money.

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