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When I quit my full-time job to stay home with my son, my husband and I cut up our only credit card (literally -- I took a picture to prove it!). We never carried a balance on it or got any interest, but paying one big bill at the end of the month made it hard to know exactly how much we were spending in each category of our budget. And with our income cut in half, we wanted to make sure to avoid over spending so we didn't start incurring interest and late fees.
Because we pay all of our bills electronically, we decided to rely on our debit card. We soon realized this made it hard to budget for unexpected expenses.
We had a savings account, but looking at one lump sum made it hard to determine how much money we had saved for each line item in our budget. Many financial advisers advocate the cash envelope system-placing a set amount of cash each month into an envelope for each budget category. This is a useful tool, but it wouldn't work for bills that we pay online. We came up with a solution: an electronic "cash envelope" system. Here's how it works.
Gather Data
We looked back at a year's worth of data to see how much we spent in each category of expenses like food, gas, utilities, car repairs, home maintenance, and insurance.
Then we categorized those items by frequency. For example, we buy food and household supplies every week, but the timing of our other expenses varies. Some utility bills are due every month, like the phone, electric, and natural gas bills, but others are due only every three to six months, like the water bill and car insurance.
After gathering our data from a whole year, we divided the amount of money we spent in each category by the number of paychecks my husband gets per year. We knew how much money we needed in each category; now the question was "How do we organize it?"
Decide How Much Money to Leave in Your Joint Checking Account
The easiest way to access money for ongoing expenses is our joint checking account. Weekly and monthly expenses like groceries, gas, and the electric bill come out of this fund. Subtracting the amount on our checkbook register each time we make a purchase is key to making this work.
Create Multiple Savings Accounts
For ongoing, non-monthly expenses, we decided to open multiple savings accounts at our bank. When we need to pay a bill from one of these categories, we transfer the money into our checking account using online banking. Some Web sites even allow us to make payments directly from one of the savings accounts.
Our savings account categories include home and car repairs, non-monthly expenses (this includes money for car insurance, housing association dues, and the water bill), gifts, and mortgage. Our bank allows us to name the accounts online, so it's easy to tell them apart. Although the mortgage is a monthly expense, we decided to set this money aside in a separate account just to make sure we don't accidentally tap into this large sum when using our debit card.
Set Up Direct Deposit
The biggest challenge in budgeting is discipline, but using direct depositing has solved this problem for us. My husband's employer allows him to direct deposit different amounts of his paycheck into different accounts, ensuring that money we need to save stays out of our checking account.
Come up With a System That Works for You
Although our system works well for us now, it took some tweaking. Communication, accountability, and discipline are key.
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