Revamping Our Money Management System
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?
Filed under: budgeting, targeted savings · Tags: money management, revamp
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This is really, really similar to our “maternity leave/job search” money management plan. The annoying thing is that due to serious cost of living increases in our new location, I really need to find a job with a good raise myself before we run through targeted savings (which will last 4-8 months after my short paid maternity leave…I hear babies are expensive, so if we do run out on the early end, might have to find a night, weekend, or freelance job to help patch bills together).
I’m not surprised it’s similar to what you’ve come up with since we’re in such a similar situation. :/ I’m confident you’ll be able to manage, whether it’s part-time or full-time work. That is quite a substantial bit of time and you’ll be able to accomplish a lot!
Sounds like a comprehensive plan. I really like the white board action :). Thank you for the link to my spend-nothing mindset post–I know it’s unusual, but it works out well for us. I’ll be curious to hear how this new approach works/feels for you after a month or two. Thanks for the level of detail you’ve shared!
Mrs. Frugalwoods recently posted..September 2014 Expenditures
Thanks! The whiteboard was a genius birthday gift from Kyle. I say we’re going to try to adopt that mindset more so than our traditional budgeting, but I still have hopes of buying an expensive camera and vacation. 🙂
I will probably end up revamping my money management system a little bit once I start a new job. I have an offer for one job that pays biweekly with annual/monthly RSUs and I will probably shift all of my paychecks to go to my savings account and then transfer out money monthly to checking for spending and when there’s extra to mortgage/investments. Plus, I’ll max out my 401(k) with my first couple paychecks each year going forward, so that requires increasing my savings account buffer a bit and makes it the same transfer year-round.
When I was in college, I kept $200 in checking, deposited my paychecks into savings, and paid my credit card bill out of savings every month, since I just kept one savings account. It worked out great!
Leigh recently posted..September 2014 net worth update (+0.1%)
I didn’t know you could max out a 401(k) in only part of a year. Does that mess with the match (if any) at all?
That’s a great model of saving first and sort of giving yourself an allowance for spending. I did something similar in my first year after college, but that was because I didn’t trust myself not to overspend and go into what I needed for bills.
Sounds like a great plan! I think it’s wonderful that Kyle’s income + your side hustle income is enough to cover living expenses and still save a little. That’s fantastic for funemployment.:)
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Well, we’ll see if it is enough. It might be in months where we don’t have any purchases that would have previously drawn on our targeted savings accounts. In the month we buy a DSLR, I fully expect to be drawing substantially from savings. I’m not too optimistic for October but more so for November.
We like one big savings account with smaller temporary accounts if we’re saving up for something specific like Christmas, a larger purchase or (like now) a potential move. (Related: We were almost neighbors for a brief moment. I was thisclose to a job offer in your area for a position that wound up not being filled. Le sigh.)
I think you and I have discussed our eventual system – partially joint, partially separate finances, so L’s mom has limited access to a shared account in case she needs to. We’re not there yet though, so our system is currently separate except for a joint savings account/emergency fund.
That’s too bad! We like this area so much and there are lots of great people here. Good luck finding something you like just as much if not more.
I guess for us those specific savings accounts just kind of overran and became perennial. :/ I think I would like them more if they were one-off – easier to set concrete goals.
“We will definitely consider bringing them back once we have stable income and expenses again.”
Maybe you’ll like not having them! We used to have some targeted savings accounts when we we had about 40% of the income that we have today, and it’s soooo much nicer not to deal with all of that extra hassle.
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^ I agree with Mrs. PoP. I think I might be back to just using one savings account for good now. I’ll probably even toss my Roth IRA money in it at some point rather than in a separate savings account. Once I’ve paid off the mortgage, my plan is to toss everything into taxable investments except for a 6 month buffer and I’ll just withdraw from them to do anything big, including buying a car.
Leigh recently posted..Managing a biweekly paycheck
I love that plan of investing everything except a sizeable EF!
The targeted savings accounts do take a bit of work, but I think the big benefit was setting out in advance the parameters for our spending so we could have peace of mind when making purchases. Maybe with higher incomes that won’t feel as necessary, but I rather suspect with my personality I’ll always have goals that slightly exceed our capacity for achieving them. 🙂 But we will give the one-savings-account thing a fair shot over the next several months to a year. Neither of us has ever managed things this way before!
We use mint and set out loose goals for spending each year, but tend to keep things is pretty broad categories. “Shopping” includes everything from a new computer to haircuts to clothes to gifts to scuba certification… but we have a loose goal of $500/month on that big category on average. Mint keeps track if we are tracking over/under for the year by making it a carryover budget. If we were to do separate personal spending budgets to ensure we’re “shopping” equally, we could run them the same way with 2 sub categories Shopping-Mr & Shopping-Mrs, it would just take more active categorization to make sure purchases were sorted correctly. I think what you’re aiming for is pretty doable in a more laid back fashion, especially once you guys get to your post-grad earning scenario.
Mrs. PoP recently posted..Won’t You Be My Neighbor?
I like the idea of targeted savings accounts (though mine were mostly “on paper” rather than actual accounts), but i agree with those who said it is a lot simpler to skip them and just do one.
Then again, I do still have a few targeted savings accounts: “Short term savings” generally replaces all former targeted savings and smooths out cash flow (insurance, gifts, electronics, etc.). “Cash reserves”, which I recently renamed from “emergency fund”, because it sounds more optimistic to me. 🙂 The third is house fund, which was formerly the downpayment fund. It is now is for major planned house projects (furnace, new roof in x years, etc.). Finally, have a property tax fund. Our taxes are super high (around $1k a month!) so it make sense to budget these specifically. Many mortgages have this built into the payment and in escrow, but ours doesn’t, so we do this on our own.
It sounds like you have made the savings accounts a bit less targeted but still slightly divided. That’s an interesting solution. I know our targeted savings ranged from “CSA,” which was only to buy CSA shares, to “Cars,” which was for car repairs, parking permits, insurance, registration fees, property taxes, etc. It’s easier to set super targeted goals, but more useful to have the higher-level funds.
That is interesting that your property taxes aren’t automatically built into your payment. How often do you have to pay it – once per year?
Yeah, anything that isn’t going to be $5k+ bill we can basically cashflow, at least with the help of a short term savings bucket.
We will pay them twice a year. Insurance (much smaller number) is once a year. I guess we could lump that in the same bucket.
Thanks for sharing as always! This is a little different from the typical “pay yourself first” mindset, but it sounds like you guys don’t have to worry about that since you have a month buffer.
I get paid weekly, so I first determine how much I need to keep in my account to pay for upcoming bills (i.e. $200 from each paycheck), then pay off my credit card (all or most of my spending goes on here), then allocate the remainder (hopefully there is one!) to my savings account or my Roth. My goal is to max out my Roth every year, so it depends on where I am with that. In addition, I contribute to a 401K.
I think I can improve by creating a one month buffer for next month’s bills or take it a step further by having a one month buffer totaling my entire income, then doing one transfer a month for bills, credit cards, my savings account and my Roth. However, I like having a zero-sum budget week to week. It’s a control thing for me.
As I understand, that is how You Need a Budget works, so I’ve thought about purchasing it, but I don’t know if it’s worth the money!
I’m not sure why you think that our plan doesn’t qualify as “pay yourself first?” IMO pay yourself first can mean that you either prioritize savings in your monthly budget/spending plan so you make sure it happens every month (instead of saving what’s left) or that you literally save before you pay bills or make purchases. Since we keep to our percentage-based budget I do think we pay ourselves first figuratively (first interpretation) and also at least half-literally (second interpretation) because our twice-monthly Roth IRA contributions occur near the beginning and right after the middle of each month and we schedule an IRA contribution on the day the we receive any irregular income. Haha I sound really defensive here but I’m just trying to explain how we both conceptualize and implement “pay yourself first,” which I fully believe in. I actually like the pay yourself first and last model even more, which I think is what you’re doing by saving into a 401(k) and then also sweeping remainder-money into your Roth IRA. We were doing something similar by just saving leftovers into our short-term accounts, which have now become our general savings account.
I definitely would suggest creating more buffer by either or both of the methods your outlined. I think I’ll write a post about that, actually. I’ve always practiced buying things/paying bills after being paid because I spent my first three years after college using debit only (and being paid once per month). You can still do a weekly zero-based budget with more buffer in place, no?
I’m not too familiar with YNAB either for the same reason. I have seen some offers around the blogosphere recently for free subscriptions, though, so maybe those occur periodically.
I actually make my financial framework every month to see how my monthly budget is divided and spend. I kinda like how it works like how a framework works in research. It informs me the scope and limitation of my budget and helps me be focused on everything actually.
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That is great that you are doing an individual budget every month. We’re kind of halfway there in this situation with calculating our income monthly but not necessarily tailoring our spending.
My husband and I are going through a financial transition that is somewhat similar to what you and Kyle are: he left grad school at the end of the spring semester and is now looking for a job, and in the meantime we are living on my stipend. We have always had a very relaxed “budgeting” system. We have a general idea (not even written down anywhere) of how much we should be spending (e.g. groceries under $100/week) and track spending in Quicken. We don’t have any automated transfers or targeted savings accounts. We look at non-budget expenses on a case-by-case basis. When the checking account gets above a certain level, I make a big one-time manual transfer to savings. We do Roth transfers once a year.
We’re expecting to have to draw from savings this month or next month to pay the bills, but haven’t had to so far since I had a lot of extra summer income from teaching and other university sources and we let that sit in checking rather than transferring it to savings as we would have done if we still had two incomes.
I’m a bit tempted to have some more specific savings/spending goals, but that would drive my husband nuts. The super-relaxed way works for us.
It doesn’t sound like you need to change your system at all! That is great that you have managed to cash flow the last several months on just one stipend and some related income and that you have savings as well. Our living expenses weren’t anywhere close to being able to do that! It seems like you really can trust yourselves with your case-by-case evaluation of spending because you’ve done so well to this point. I can’t imagine how we would do this transition with no cash savings, which is how we operated in our first few years of grad school. Maybe your husband will be more amenable to adding a bit more structure once he has found a job and you have more income to play with.
As odd as it may sound, I think he will be even less amenable to adding more structure after he gets a job – since we’re pretty stable and financially very healthy, he doesn’t want to feel deprived or regimented! We’re also (like you and Kyle) not looking to retire super-early and we already have a future house down payment locked in a CD, so we don’t have any big near-term financial targets we’re aiming for!
It’s not worth the marital stress, then! Enjoy your money! I hope we’ll be in that place soon or at least closer to it. Congrats are already having the house downpayment saved!! What’s keeping you from buying now, or are you looking?
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