Yesterday we discussed our 3 Principles for Budgeting and Tracking. To recap:
Principle 1: The purpose of tracking and budgeting is to help you understand if your spending is in line with your goals and values. Only then can you tell if a purchase is worth the money.
Principle 2: Organize your categories based on how easily they are controlled.
Principle 3: Your budget is a living thing that you will revisit on a regular basis, so don’t stress about making it perfect
Today we’d like to touch on a handful of special circumstances that warrant some additional attention. Tomorrow we’ll start moving more into the mechanics of building a budget.
Remember Principle 1? That tracking and budgeting are all about measuring your values against your resources? Here’s why money can be a huge source of friction for couples. You’re not talking about your spending, either individually or as a family. You are talking about your values, as individuals and as a family. That’s difficult. So go easy on yourselves. People’s sense of self-worth, upbringing, status, personal reward systems and more are all bound up in discussions about what spending is reasonable. Take the time to understand the why behind the decisions.
There are as many ways to divide up financial resources and financial responsibilities as there are couples, but one thing that generally correlates with happiness is to have three major budget buckets: your money, my money and our money. Everybody needs a space to do what they want, even if it’s a small space. Give yourselves room to breathe and, especially, to not have to agree on everything — even if it’s just $20 a week or a month.
Note that the yours/mine/ours buckets do NOT need to directly match up with income. How big you decide to make the pots depends on your attitude about money as a couple, and you should tread lightly and carefully while discussing this subject. More on this subject when we discuss the mechanics.
Budgeting with Kids
We can’t say it enough: include your kids in this process. Especially if there haven’t been any real spending controls in your household, your kids are going to know something’s afoot. Either you are going to have to say “no” more, or you’re going to be talking money with your spouse. There’s a good chance they’ll notice you paying attention and want to know more. So include them! Some ideas:
- Give them a fixed spending amount for a family vacation.
- Pay them an allowance (either based on completion of chores or just time-based) and, except for birthdays and other holidays, don’t buy them toys
- Have them help cut coupons or comparison shop at the grocery store with you
- Have them save up for a more expensive toy and go through a budgeting process themselves.
Budgeting for the Self-Employed
If you’re self employed you have two major issues:
- You can sometimes wind up with a ‘big check’ that makes everything seem different
- You can sometimes go without income, especially if a customer doesn’t pay
In other words, your income stream will be highly variable, which creates a difference between your income (how much money you make over time) and your cash flow (when the money actually shows up). Your mortgage company will not want to hear that you just closed a big deal and you’ll be able to pay them in 45 days. They will still charge you late fees and hit you with other penalties.
The first thing you need to do is get a decent, realistic projection of your income. If you’ve been in business for at least a year, you can do this by averaging the past 12 months. But pay close attention to trends — ask yourself if your income rising or dropping compared to last month, or the same month last year? If you don’t have that kind of history, you’ll need to make a very conservative estimate. Remember you can always adjust upwards in the future if you want to, but if you overspend now it will likely turn into long term credit card debt at very high interest rates.
Once you have a realistic projection of your income, start “paying yourself” that amount once per month. If you have an LLC in place this should be easy, since you probably set up a company bank account for the business. If you don’t have a separate checking account, now is a good time to set one up (and to set up a budget for the business, too). Transfer your monthly pay from your business account to your personal account every month, like a paycheck.
Budgeting for Higher Income and Net Worth
If you’ve already achieved the magic income level, or net worth level, where you thought you would effortlessly breeze through your financial life, then you’ve probably realized that it just doesn’t happen that way. With luck you haven’t been spending too much money keeping up with other people’s lifestyles, but there’s a good chance you’ve found yourself in a car or house that is more than you really want to spend. You may be spending your money as fast as you are earning it, leaving yourself vulnerable to emergencies and changes in fortune, and unable to seize new opportunities you uncover. If that’s the case, the same principles apply to you, but you’ll have more flexibility and more challenges.
For one, it will be easier for you to implement your/my/our money if you have a bit more disposable income. The risk is that you overdo it, but be grateful that you have the chance. Second, housing and auto payments may not really make sense in terms of your budget. This is because past a certain income or net worth, you don’t need to finance larger purchases as much as you did in the past. So the idea that a mortgage or a car payment shouldn’t exceed X% of your income doesn’t make sense – especially if you don’t want the cost of your house or car to rise proportionally to your earnings. Also, you may find that your earnings are highly variable due to business conditions, and so budgeting based on your monthly take-home pay don’t apply to you.
In these cases it’s important to have a clear idea of what your current goals are, so you can allocate your resources wisely. We’ve noted in the past that a high income doesn’t necessarily lead to happiness. Get a good handle on what you think is reasonable to spend, and build your budget from there.
Next week, the mechanics of building a budget.
Don’t Spend Any Money… Establishing a baseline for spending | Super Frugalette | interesting take on the difference between what you have to spend, and what your budget is
Honey, We Need to Talk … About Money | MintLife | On the value of discussing money in a relationship, with some conversation starters.
Five Budgeting Myths | FiveCentNickel | Budgeting excuses removed
My Self-Employed Monthly Paycheck | BudgetsAre$exy | Dealing with the ups and downs of self-employment
Thumbnail Photo: Blocks 1 by Crissy Alright
Story Photo: Detour by F Delventhal