According to a 2009 article by Ron Lieber, 45% of divorces are due to differences over finances. This is no surprise, considering that the majority of families don't even have a budget. According to Gallup, only 1 in 3 Americans prepare a detailed budget. Without a budget, how can you tell which partner is spending more on frivolous purchases? How can you prioritize between the husband's desire for new golf clubs and the wife's designer handbag? Without a budget, how do you know how much to save and how much to spend?
Running a family without a budget is like running a business without looking at profit and loss. Yet coming up with a budgeting system that actually works for you can be challenging. You need a realistic budget that allows you to live and isn't too much of a burden to track. You also need incentives to stick to the budget. In short, you need for life with a budget to be better than life without a budget. I have the solution.
For most of our marriage, my wife and I actually operated the business of running a family without a budget. "Just be reasonable" was the mantra, but it didn't work. Operating without a budget was a failing strategy for us for the following reasons:
- We were spending too much. Many months we were losing money.
- It wasn't clear who was being responsible and who was splurging (according to my wife, it I me who was splurging).
- We were fighting about money. Worse yet, we were worrying about money.
So we came up with an ideal approach to family budgeting that has served us well for the past 6 months. I will show you exactly how to prepare a family budget you can stick to, but first I want to share the benefits we have seen with this particular budget:
- We no longer feel any guilt or anxiety about purchases we have budgeted for (regardless of monthly income)
- When we are profitable, we both have some amount of personal money to spend however we want without the need to explain anything (i.e. more freedom)
- We have been able to travel to Italy, Croatia, and Florida on trips that were paid for upfront
- We dramatically increased our income because we were more motivated
- We saved, even as both of us have splurged like never before (guilt free)
The results have been amazing. Now I will explain how we did it.
Figure out your basic monthly expenses
Go through all of your financial statements from an "average" month. Choose a month when you were not shopping for Christmas and were not taking a vacation. How much did you actually spend? You don't need to analyze every detail or every category of expense, just get that number for reference.
List all of the expenses that you think are vital to your way of life. How much do you realistically think you should spend on groceries even during a month when your income isn't great? How much wine will you realistically drink? Do you go to the gym? How much gas to you use in a month (you can get this from your statement if needed)? What is the basic amount of entertainment you need? What is the minimum you will spend on restaurants? How much do you need to spend on cloths per month? Break all of this out on a spreadsheet.
The key to this step is that both of you have to agree. If one of you doesn't agree on a basic expense, then it doesn't make the budget. These are minimums that you both agree on. Keep in mind that, the more "profit" you can show in a month beyond this basic level, the more you will personally have to spend on yourself. I'll get to that later, but the point is that you have a personal incentive to cut this "minimum monthly budget" down to an actual minimum.
Compare the total amount you plan to spend in your monthly budget to the amount you actually spent in your example month (your step 1 amount). Your budget should be less than your example month, or you'll need to go back and take some things out.
Compare the monthly budget with your total family monthly income after tax. Do you earn enough to cover these expenses and more? If not, your first priority is to earn more money. You need to face reality. For the time being, you should decide whether to decrease the budget so that it is in-line with your actual income, or whether you want to spend in a deficit over the short term as you focus on earning more money in the coming months. Any deficit spending (i.e. monthly loss) has to be tallied. You can't get to a profit for you to split unless you first cover any past losses.
When you have prepared your budget for the month, move the money to where it needs to be for the coming month. Withdraw all of the cash you need for the month, and place enough money in your shared, family debit account to cover what you have budgeted for plus $1,000 in case you go over. Now you can't change any of this throughout the month. You'll have to stick with it.
Keep in mind that part of your budgeting should include a minimum amount of cash that you each need to have in your wallet for the month. This is your personal money. There can also be a "family cash" amount for miscellaneous purchases (restaurants, cleaning services). Put this in a separate wallet and take it with when you go out with your child for ice cream. Plan all of this ahead. Be realistic about how much money you actually need to make life livable.
Now enjoy your month. Stick to the plan and spend budgeted amounts without any guilt.
Track results on the 1st of next month
At the end of each month, you'll have to go through the statements to figure out what you actually spent. Put the actual amounts in a column on the monthly spreadsheet next to the budgeted amounts.
Figure out how much you actually spent and how much money you have actually earned (after taxes). If you run your own business, you will have to budget quarterly tax payments in your expenses.
Your actual amounts should become the projected numbers for next month's budget.
Step 3: Divvy up the thirds
Now you are left with a total profit (or loss) for the month.
If you end up with a profit, you should split it 3-ways: 1/3 of the profit goes directly to you as spending money, 1/3 goes to your partner, and 1/3 goes to savings. The higher your profit each month, the more money you will have to spend on yourself. Your partner has nothing to say about the way you spend this money. Withdraw it as cash, put it in your Paypal account, do whatever you want to with it and answer to nobody. You have earned it.
While the initial process of coming up with a budget can be difficult, once it is done you should be able to move forward in your relationship without ever having to fight about money. You will each learn to stick to a budget. You will not purchase anything extra for yourself until you have earned your portion at the end of the month. If your partner ever comes to you with a request to buy something, the answer is, "Use your own money if you have any left." Otherwise, if it isn't on the budget, it isn't allowed.
With this approach to budgeting, both of you will be free to spend money guilt free...after it is earned! If you decide, instead, to use the profit on a family vacation, you both have to agree. If both of you agree on a purchase, it comes from the family money. If both of you do not agree on a purchase, then it has to come from your personal money.
It is extremely important to be honest and trustworthy. If one partner cheats the budget, it is an extremely serious offense. In that case, everything falls apart and you are in serious trouble. You have to commit to honesty and transparency.
Also, note that before you split any profit as personal money, you have to cover any past losses. You are only counting profit and loss from the first month you are following this program. Each month thereafter, you will track "total to savings to-date" since starting this program. That is your key metric. If there is any loss in any month, it has to be made up with future profit before anybody splits anything.
I hope you find, as we have, that this approach to family budgeting leads to less arguing, more successful results, and more personal autonomy.