David and I have been together for ten years, and for most of those years we’ve been responsible budgeters. For most of that time we also lived in the space between pretty broke and reasonably broke. At the end of our very broke years, we were in generally good financial shape, considering. We also were about thirty with a house full of thrift store furniture, and somewhat ratty clothes. But whatever, it was worth it.
But then we started making money. Like, each of us was now making a salary that was more than our total combined salary previously. While two professional salaries might not be a big deal for a lot of couples, it felt like madness to us. It particularly felt insane to me, because my whole life had been some variant of “no disposable income to speak of.” But suddenly in my early thirties, there it was. Disposable income. I’d like to tell you that because I’d spent a lifetime perfecting my savings skills, the moment we started making money, our budgeting went from good to perfect. But of course nothing ever works like that, does it?
When, for the first time in my life, it felt like I had money, I lost all perspective on how to answer the question, “Can we afford this?” Because the reality was, unless we were talking about a house, or a car, or something that is genuinely very expensive, the literal answer to the question “Can we afford this?” was yes, and I knew it. Yes, we could afford a meal out. Yes, we had money in the bank for affordable plane tickets. Yes, there was money for a new dress. When for most of your life the answer to “Can I afford this?” is a flat out no—and then that answer switches to a yes—it can be hard to figure out how to manage money.
We spent money without really strict restraints for a few years. I’m not terrifically embarrassed by this fact, because you have to cut yourself a break sometimes, and we never over spent. We generously paid babysitters who needed the money, we traveled, bought some less ratty clothes, and slowly decorated our house. Whatever, life is short, and it was worth it. But recently, we decided that it was time to pull things together. After some analysis of what was working and what wasn’t, and reading about the way other couples handled money, we came up with a new system, and it’s working. Here is how we do it:
What Was Working For Us:
Our budgeting and saving over the past few years hasn’t been all bad. We were doing a lot of things right, but here are the things I particularly want to call out:
- Automated accounts: We did some work a few years ago to set up our accounts so that money moved between them on a monthly basis automatically. In addition, all of our bills auto pay, right down to our bank mailing our landlord a check every month. This means that when life gets hard (like the months I had serious depression during my pregnancy), we don’t have to pay a lot of attention to know that the basics of our finances are covered.
- Personal Accounts: For years, we’ve set things up so we each had personal spending accounts that were nobody else’s business. This remains one of the smartest things we’ve ever done. (More on that below.)
- We opened Roth IRA’s early: When I left my corporate job, I rolled over my 401(k) into my Roth IRA, which was smart. We’ve both had Roth IRA’s sitting around for years (since the point of a Roth is that your income grows tax free, it’s smart to start them early, even if you don’t have a ton of money). But Roth’s have strict limits on how much you can invest in them a year, and we usually just roll in whatever amount of money our accountant instructs us to contribute at tax time.
- Automated retirement accounts (that we ignore): While our Roth’s were smart, the really smart thing that we set up was a SEP IRA. (A SEP IRA is very similar to a 401(k), for the self-employed.) A few years ago, I decided to contribute a not insignificant amount of my monthly earnings directly to a SEP IRA. I put all of it in a moderately aggressive mutual fund, since I have many years till I retire (we did the same thing with a 401(k) for David, as soon as he qualified for one). I then proceeded to totally ignore this account, for years. (By totally ignore, I mean totally ignore. Off the top of my head I can’t remember which financial institution it’s at, or what the login would be.) Here is a funny thing that happens. If you open a savings account, set up a noticeable monthly contribution, and then sort of forget it’s there for a period of several years, it turns out quite a bit of money builds up. Money, that, possibly, you actually have no idea that you have. (“Wait, how much did you say was in there? No be serious. Wait, WHAT?”) The more of an airhead you are about this, the better. Also, check the rules of your retirement investment vehicle, but for many of them, there are rules that allow you to pull down some of the money to buy your first home.
What Was Not Working For Us:
- Savings accounts right where we could see them: All of the good things we were doing with our retirement accounts? We were not doing with our savings accounts. We kept our savings accounts right where we could see them. Worse? We had them set up so that we could automatically transfer money from our savings account to our checking account. Which is a thing we did. Not infrequently. So when I went to answer the question, “Can we afford this?” I looked at our savings account, which had a lot of money compared the $200 plane tickets we were pondering buying. So we figured yes, we could afford it. But we were not keeping track of just how much “affording” we were doing every month, so our savings account did not seem to grow like it should.
- Credit Cards: I almost don’t want to get into this, because I have a deep hatred of credit cards, and I know better. But back when I was pregnant, I let David get us the British Airways card he was dying to get us. He promised that he’d charge his expenses to it, but keep track of everything and pay it off and not overspend. I really should have known better… he just seemed so excited by it. We did, in fact, pay off our credit cards every month. (If I managed to survive on minimum wage in NYC with no credit card debt, it’s not like I was going to allow us to get into it now.) But it turns out more things were charged to credit cards than I realized, and of course, it’s nearly impossible to budget on a credit card. (On the plus side: he did get his BA miles?)
What We Changed:
- Ditch the Credit Cards: First, I removed our credit card from our wallets. We then turned off all the things David set to automatically bill to that credit card to earn us points. We kept the auto pay on though, so that the credit card will pay off automatically at the end of every month, just in case it gets used. (These days we have a pretty reasonable credit history, so we don’t need to worry about building it with credit cards.)
- The family Account. Second, we created a new “family account” to use instead of our savings accounts, for big purchases. Read on for details.
How Our Finances Now Work:
It has never worked for me to set up a complex line by line budget, and try to match up every expense at the end of the month. Budgeting this formally works even less well for me now, since I run a small corporation, and I have to do the company books exactly that way every month. My home budgeting needs to be a little more low-key. I’ve also generally failed at using online services (we use Mint, but mostly to count money, not actually to budget it).
What does work for me is setting up literal or virtual envelopes of cash to manage. I need limits, and I need an easy way to keep track of those limits. So what we’ve done is set up our finances so we have a plethora of different accounts. Each account has its own debit card (marked on the back to denote the budget it goes to) and we spend from various accounts throughout the month. These are our accounts:
- Our Joint Account: Both of our paychecks deposit directly to our joint account every month. (I’ve written at length about why I am a firm believer in joint finances for married couples, you can catch up on that here.) The money that stays in this account is the money that is accounted for on the main household budget we draw up. It covers things like rent, food, healthcare costs, other regular monthly bills, and haircuts. Money designated for other accounts transfers automatically out to those accounts on the second and sixteenth every month (the day after pay day). We’ve set up a monthly transfer to savings, but at the end of the month transfer any additional funds left over. (AKA, we keep a little extra in there till the end of the month, because nobody likes overdraft fees.)
- Meg’s Account/ David’s Account: Both David and I both have personal spending accounts, where we get exactly the same amount of spending money deposited every month. The idea behind these accounts is once money is deposited into them, that money is yours and who you spend it is nobody’s business but your own. You can save it (as we each do when we’re aiming to get something big), you can spend it on daily lunches out, you can buy bat shoes with it, you can spend it on every silly gadget that Amazon Prime stocks (cough, David). Whatever you do with it, it’s YOUR BUSINESS. These accounts have saved us from more fights than I could ever begin to catalogue. The conversation we’ve had over and over has gone something like this, “Can we get a new bigger TV?” “I mean, I can’t imagine why we would need a bigger TV again…” “You just don’t understand these things.” “…With what money?” “My money.” “Oh, well then, you can do whatever you want.” (I learned how much David likes TVs early, when he was in law school pre-marriage, and I told him if he could save up half the money for a TV I’d contribute the other half. He got a part time job in a day, helping out a professor, and had the money in a week. Then, as a woman of my word, I had to cough up the money. Lesson learned.)
- Our Family Account: This account is brand new, and has been a revelation to us. Every month we deposit a fixed amount into this account, with the idea that the goal is to save whatever we don’t have to spend. Then when those one off expenses show up, and we have to ask “Can we afford it?” this is the account we look to, not the whole of our savings. In only a month it became obvious just how much we were spending on those “one off” expenses, and budgeting kicked into full gear for the first time in what feels like a long time. It was a relief, honestly. Just like a toddler, I want to know what the limits are, so I feel safe (and place full value each $20 bill).
- Our Savings Accounts: We have our savings accounts divided into two main chunks. One is essentially in cash, and we keep a few months of emergency funds here. The bulk of our savings are in a mutual fund (meaning it’s on the market). We can get to it at any point, but we know that money is going to be making and losing money, and we’re in it for the long haul. We still turn to our savings accounts in larger emergencies—our family fund isn’t necessarily set up to cover $4,000 car repairs (knock wood)—but these days, we turn to it a lot less. In fact, I’m working on forgetting all about it.
- Our Retirement Accounts: Covered above. We have a SEP IRA, two Roths, and a 401(k). We try to ignore them. Also, because we live in a community property state, we don’t worry about equally distributing retirement funds, so they’re half in my name and half in David’s. It’s easiest to put a bunch of money in my SEP IRA, so we do that. In the event of a divorce (knock wood, again), our assets would be evenly divided so it doesn’t matter much.
A note for others that are self-employed:
People who are self-employment and/or running a company handle paying themselves in a lot of different ways. Because of that, I thought I’d offer a quick outline of how I handle my (personal) business finances, in the event that it helps anyone else.
Because I thrive on consistency, I’ve paid myself a salary since day one of working for myself. A few years ago I incorporated the business, so now I’m paid an official salary through a payroll service, just like everyone else that works here. It makes for easy budgeting, but it also means that, as an employee of the business, I’m paying into social security and disability, in case I need them later. However, I do occasionally try to take advantage of the flexibility that I left excellent health benefits for. Namely, even though my salary never changes, I sometimes bonus myself out for specific things. Like Christmas. I try to give myself a Christmas bonus just big enough to cover our Christmas expenses (don’t worry, other people get Christmas bonuses too). And then I think about what a great boss I have (even though most of the year she’s SO demanding).