Monday, May 11, 2015

A better approach to a monthly budget

I have Quicken for our personal finances, and I tried for many years to create a monthly budget and stick to it. I never had much success. Somehow I always found myself pulling small amounts of money out of savings to pay for something at the end of the month, usually our credit card bill. Jim and I charge everything we can throughout the month (to get points on our Southwest Airlines credit card), and then we ALWAYS pay it off at the end of the month.

At the beginning of 2014 I came up with a new system that worked beautifully all year! And into 2015. And it got us off of living paycheck to paycheck.

In August 2013 I started a new job, and I was getting paid twice a month instead of every other week. Something about the timing of my paychecks made our automatic mortgage payment a bit stressful. That was a large withdrawal from our checking account, and I never knew if there would be enough money in the account. What I decided to do was change all of our deposits to our savings account, and then pay a monthly "allowance" to our checking account. I adjusted the timing of that deposit a couple of times throughout the year before I got it just right. I needed the transfer to happen right before the credit card bill and mortgage were due.

It has worked so well! I don't ever have to think about the balance of our checking account because our allowance covers all our automatic deductions from checking, and we charge everything else. Our credit card balance does vary, but only around Christmas was it higher than the budget allowed, and because we had been under budget during other months of the year, there was some surplus in the checking account to cover it.

The other thing I did was move our emergency fund savings into a high yield online banking account. We're earning higher interest there, and it's not as easy to transfer money into our normal checking account, so the temptation to overspend is (somewhat) removed. Midway through the year I moved some of the surplus from our normal savings account into the online savings account, but I never did it during the second half of the year because I knew we'd owe money on our tax return. We ended up owing a lot because of a side job Jim had taken on last year, but because none of that money came out of the online savings account, it didn't feel like we were losing any of our savings.

Even better, with the job transitions Jim and I have gone through in the last couple of months, the timing of our new paychecks hasn't mattered as much. Because we still have some surplus in our checking and savings accounts and because of the continuation of our monthly "allowance" transfer, our finances have not been interrupted. 

For more information on how to live on last month's income, check out this article from one of my favorite blogs, The Simple Dollar.

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