Kyle and I have had a fairly stable money management system for the last few years, which we laid the basis for shortly after we were married. I have trumpeted its benefits in many blog posts over the years and think it worked very well for us for those years, though it was probably more hands-on than most people would like.
In brief, our money management system between 2010 and 2014 was to:
- Practice percentage-based budgeting in that we gave 10% of our gross pay to our church and contributed at least 15% (up to 18% recently) of our gross pay to our Roth IRAs. This applied not just to our stipend paychecks but also to any side hustle money we brought in (but not gifts necessarily).
- Tightly budget our take-home pay using our “everyday budget” for our typical bills like rent, utilities, and food, with a small buffer left over each month for unexpected expenses.
- Save every month for irregular expenses using our short-term targeted savings accounts and then pull from those accounts when those types of expenses occur.
- Use our general savings account (aka our Nest Egg) to cover large unanticipated expenses, particularly ones that are going to be reimbursed. (This one was the least intentional aspect of our system, but started happening after we had to move unexpectedly in 2013.)
- Zero out our checking account (not literally) at the end of every month. When there is excess, we transfer the balance either to our general savings account if it needs reimbursing or to a fun targeted savings account. When there is a deficit (rarely), we transfer the balance from our general savings account to checking.
Our take-home pay dramatically reduced in September as it was the first month I didn’t have a full-time paycheck, so we won’t be able to use the budget that we’ve had in place for the last few years. In fact, we needed to revamp our entire money management system starting in October because we likely won’t be able to cover all our expenses with just Kyle’s income. Thankfully we have unintentionally prepared for this event over the last couple years by building up a lot of cash in our targeted savings accounts, so we don’t anticipate having to dip into our emergency fund or investments.
The rest of this post describes how we’ll handle money through the rest of our employment transitions. Once we’re both in stable jobs, we’ll likely return to a system similar to the one we have been using because we liked it so much!
1) Calculate our money puddle each month.
The money we earn in a given month is allocated/spent in the subsequent month; our September income is funding our October budget. Now that we have a somewhat variable income, our income will be different month-to-month so we need to calculate it.
We will add up our gross income and then we will calculate our net income. I’m defining our net income as our gross income less our income/payroll taxes and our health insurance premium (since that is a payroll deduction). Kyle’s tax withholding is sufficient to cover his tax due, but for our irregular income we do not have anything withheld so we need to transfer out and save separately enough to pay our federal and state income and self-employment taxes.
The next step is to apply our percentage-based budget to our gross income. We will give 10% to our church and save 15% into our Roth IRAs.
Now, we have arrived at what I’m terming our “money puddle,” which is our income less taxes, payroll deductions, and our minimum giving and saving. This is the amount of money available for us to spend each month, and I plan to report it as the top line of our monthly spending reports.
2) Keep a similar everyday budget.
We do not need to dramatically cut our budget at this point (and if we did I’m more open to getting a roommate than eating Raman for every meal). Our everyday budget consists of: rent, groceries, eating out, electricity, internet, water, car gas, and phones. We are keeping the same budget levels for each of these categories, though I expect to be a bit more frugal with eating out, groceries, and electricity uses – just the low-hanging fruit. Really we are sort of switching to a spend-nothing mindset, but these are typical and pretty necessary expenses.
3) Combine our targeted savings accounts and stop recurring contributions.
We have merged most of our targeted savings accounts into our general savings account. We had been funding these targeted savings accounts with $1,065 per month, but we have now stopped the auto-funding. The only ones we are keeping separate are our newly established house down payment account, our charitable giving account, and our taxes account, but these accounts will not have any ongoing contributions (except the money we put aside for taxes). The accounts that we combined are: travel and personal gifts, cars, entertainment, CSA, appearance, medical, electronics, and camera into our general account. The money from these accounts obviously was earmarked for a variety of expenses from needs (car insurance) to wants (DSLR). We will still pay for both needs and wants out of this combined account, but keep the same spending sensibilities in mind that have helped us build up this great amount of cash in the first place.
4) Transfer between checking and general savings only once per month.
I used to make a manual transfer basically anytime we had an expense that needed to come from a targeted savings account, which amounted to around 5-15 per month, plus one at the end to zero out. (That is on top of the recurring transactions to fund the accounts.) Since we will no longer have all the individual savings accounts, I will just do one transfer at the end of each month to zero out. I expect to be drawing out of savings every month as irregular expenses occur unless I am bringing in very significant income.
5) EPF income and expenses will stay separate for a while.
In 2013, EPF made a small profit. We kept all of our website income and expenses separate from our personal money management for the duration of the year, and only took the profit “home” after we paid our 2013 taxes in April 2014 (and it went directly into our general savings account). I plan to do the same for our 2014 income. As of this writing, our online work account is slightly in the red because of FinCon14 expenses, but I expect that we’ll be in the black by the end of the year. However, we will continue to keep those income and expenses separate for a time, probably through the end of 2014. If we need to pay estimated tax in the fourth quarter of 2014 (due January 15, 2015), I will likely bring the profits over to our household income in early 2015, make the Roth IRA and tithe transfers at that time, and put the balance into our general savings account.
So that is the new, simplified system! It’s hard to say goodbye to our targeted savings accounts because they have brought us so much peace of mind over the last four years. We will definitely consider bringing them back once we have stable income and expenses again. It is a bit fun for me, though, to calculate a new money puddle for each month, and to challenge myself to earn more each month.
Have you ever revamped your money management system? Do you prefer many separate savings accounts or one large one?