A Shift in Perspective: Micro-Budgeting to Big-Picture Finances

One of my New Year’s resolutions was to simplify the way I budget. Over the years I have grown consistently obsessive over every aspect of my finances. It was beginning to become a problem.

So after many months in a row of daily updates, fretting over the categorization of expenses (should paper towels purchased at the grocery store go under Household, or Food, or should I create a new Paper Products category – ugh!), I have decided on a new approach.

Using Two Checking Accounts to Manage Big-Picture Household Finances

From now on, I will simply have my paycheck split into two checking accounts. The majority of the money will go to a “Bills and Savings” account, where I will have regular expenses and savings contributions (Roth IRA, DRIP stocks, etc.) automatically deducted.

Things like the mortgage, utilities and any subscriptions of services we pay for on a monthly basis will come from this Bills and Savings account. What’s left in the primary checking account will be ours to spend – our “What’s Left” account. That’s it; that’s all there is to it.

Don’t worry too much over the “split” either. It doesn’t have to be exact because you can theoretically move money from one account to the other.

Add up all of your regular bills, plus your monthly savings contributions, and have roughly that amount taken out of your paycheck and moved to your Bills and Savings checking account. And when estimating for this account, round up just to be safe.

For most people, that split might look like a 70/30 split between your “Bill and Savings” account and your “What’s Left” account. So if your take-home pay is $2,000 a paycheck, have 70%, or $1,400, transferred to your “Bills and Savings” account.

Then make it a goal to live off the remaining $600 left in your primary checking account. Things like gas and food and entertainment expenses are deducted here. If you run out of money in the “What’s Left” account, you better start searching the pantry for food and giving up on entertainment until your next paycheck replenishes the account.

Tracking the “What’s Left” Expenditures

I am no longer tracking every penny I spend on food, or gas, or paper towels, or books and movies. I will still try to spend as little as possible on those things, and have vowed to renew my interest in using coupons where possible. However, I am not going to invest my time in tracking all of our expenses to an infinite detail, because quite honestly, looking back I can’t see what we’ve gained from that exercise.

With several months of detailed tracking available at Mint.com, and in our household ledger, I can see that we spend more money on gas than we did a couple years ago. Duh, that’s because gas prices have gone up.

I can also see that we pay a little more each time at the grocery store, and that thanks to new fees, our cable provider has increased our services. But what can I do with this information?

Focus on “Big-Picture Finances”

More important to me is the fact that we have spent less than we’ve earned. We’ve increased savings. We’ve paid off our debts. We are saving for retirement, and college, and we are funding a few sinking funds to cover those once-or-twice-a-year expenses like car tags and vacations.

We are winning over the long term. We are winning the big picture. That’s what really matters – not how much I’m spending on dog food or fast food from one month to the next (no, it is not a coincidence those examples were found in the same sentence).

Now, I don’t mean to completely knock the process of tracking expenses. It can be a very important exercise, particularly if done on a short-term basis (for 30 days, for instance), to get a handle on where your money is going. However, it isn’t something I would spend a lot of time on every single month, or in my own previously obsessive example, every single day!

Life is short. You can spend it meticulously going through receipts to split costs from your last grocery store visit between paper products, baby food, and the Redbox rental you grabbed on the way home, or you can look back at the end of the month and reflect on your increase in savings, your reduction (or avoidance) of debt, and your time spent doing things other than updating your elaborate budgeting program.

Comments

  1. The budgeting strategy that has worked best for my wife and I is actually more of a projected ledger book than a budget. All projected income and expenses listed in an Excel spreadsheet, money taken out at the end of the month, and what’s left over is for spending as well feel like it. We worry about where the money is going instead of where it went.

  2. I completely agree with your post and the way you are dividing your costs. It makes perfect sense. No point in wasting your energy to track every item as long as you are aware of where your money is going and living within your means. Good job Jason!

  3. Sent this one to my wife. Shouldn’t be too hard to implement, especially for us. We’ve tried tracking expenses and making a budget, but we fizzle out after a few months every time. Hopefully this should work.
    We’ve been able to budget for the big bills, but always had difficulty with the little expenses that add up.

  4. This is a great post indeed. It reminds me of the automated finance approaches advocated by folks like Ramit Sethi. Definitely worth considering.

    I’ve been thinking about making a switch to a setup like this, but what I haven’t yet nailed down is how best to manage targeted savings / savings goals and general non-monthly expenses whose amounts roll month to month. For something like Christmas, it’s simple enough to set up a targeted savings account at Ally or SmartyPig or something. For something like Birthday Gifts, however, which may well need to be tapped every month or two, or not, I haven’t figured out how to manage it without either tracking it with a real or virtual envelope, which means slightly more overhead, or a separate account, which has overhead due to frequent transfers.

    I’m curious about what other folks with automated finances and who are trying to avoid micromanagement do to handle this sort of thing.

  5. Finally, a simple method that can actually work for me. I just don’t have the patience to track every penny I spend. We’re giving this one a try! Thanks Frugal dad:)

  6. I like this approach, it’s similar to what my fiance and I do. We have a joint checking and savings account to pay our joint finances together like rent, food, utilities, etc. We transfer a set amount each paycheck to that account to go towards the next months bills, and then what is left goes to our personal expenses like gas and entertainment. If all of our money went into joint accounts I feel like we’d create the stressor in our relationship of having to ask to make a small purchase for fear of using too much of the other’s share, plus it allows us to save up for large expenses, and gifts and surprises for each other without tipping the other off.

  7. Interesting. The whole time I was doing “big picture” I was never able to really get a handle on our finances. It wasn’t until I switched to tracking every penny three years ago that I was really able to get things under control. Maybe “big picture” works better if you don’t have as many obligations. I could never tell if I really could afford to go out for dinner because I never knew if I was going to have a veterinary emergency or the horses were going to destroy something that would have to be replaced immediately, or we’d have an ER co-pay. All stuff that could come out of an emergency fund but really were expenses that were expect-able but not plan-able. Once I started tracking every penny and figured out what we really spent where, I created sinking funds for everything. Keeping the sinking funds set to appropriate levels for our ever-changing life requires that I continue to track every penny so I know when a fund needs to be adjusted.

  8. We have two accounts for living expenses. One is for large bills, presents and surprises, such as RE taxes, car, home and life insurances, unexpected repairs and emergencies, christmas and birthday presents and vacations. The other is for monthly bills and expenses. The remainder in our monthly bills account is for food, gas and entertainment. Savings is paid before depositing in these accounts. We review the accounts at the beginning of each year. Works great.

  9. I think the big picture approach to budgeting certainly has merits! We spend an inordinate amount of time doing things that don’t significantly increase value. Being practical is a more sustainable strategy!

  10. This sounds like it would work if out of debt and on the road to financial health. But, when you are scraping for every last dollar, in debt, or in crisis mode, this isn’t something I’d try or recommend to others.
    I like simplicity, but let’s not forget what its like to be struggling financially.

  11. I was just wondering today whether keeping track of every penny i spent really would be worth it, and decided that it wasn’t. Sure it’s good to see where you might be over-spending, but the bottom line is what really counts.
    I like the 2 checking accounts idea, and already have 2, but have not been putting them to good use as of yet. I’m going to try to stick to your suggestions here, and see how it goes!

  12. I have been using this style of “budgeting” for several years now, and having fixed expenses covered in one account leaves me free to not worry that I will inadvertently spend the electric money on new cleats for my son. Also, because my paycheck tends to vary wildly, putting the fixed money aside allows me to see when I need to stop spending completely until the next paycheck. I am currently tracking my day-to-day spending the old-fashioned way – on paper. I felt that it was a good reality check to show where I may be wasting money on the little things. It can be very eye-opening to revisit this exercise every so often.

  13. Other way of doing the same thing with a single bank account is, setting up auto savings (systematic saving) as well as bills. If you are 70:30, have that 30% automatically invested in savings. I am sure you’ll manage the month with rest of 70% of the money. You’ll never go beyond as you do not have more money at the bank.
    Provided you don’t rely on credit card buying power. If you do, you are weak.

  14. Jeremy,
    I was wondering why no one else came up with this. We do the ‘all cash’ thing as well. Money is the money you have in your hand not on your computer. We do the same thing as what you describe and it works fine! We have eliminated alle bank accounts and credit cards over the course of 2011 and we are now down to one credit card (which has a zero balance) with PC Financial, a free card and chequing account. Simple and easy to oversee. It’s what you see on “Till debt do us part” as well.

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