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.

It was nice to move the money from savings to checking and send the tax man a check without affecting our monthly cash flow. A few years ago, I probably would have been cashing a credit card convenience check to raise the cash to pay the bill.

This is the third or fourth annual (or semi-annual) bill we’ve managed to save for using sinking funds. Here’s the strategy we use:

How to Set up a Sinking Fund

1. Open a dedicated savings account at your local bank (or online bank) or credit union.
2. Determine the item(s) for which you wish to save for all year long.
3. Divide the annual expense by the number of paychecks you plan to receive before the next bill is due. For instance, a $500 annual expense would work out to about $20 per paycheck since I am paid 26 times a year.
4. Automate the process by establishing an automatic transfer from your primary checking account to your sinking fund savings account. If your bank doesn’t allow this, contact your payroll office and have the amount siphoned from each paycheck.

This can all be accomplished within a single savings account by adding up the total dollar amount of those once or twice a year expenses and dividing by the number of paychecks you receive.

You can use a ledger, Microsoft Excel, or some other tool to help keep up with the balance and which savings goal it applies to.

Some banks, such as ING Direct, allow you to open multiple savings accounts rather easily and you can even give them a “nickame.” Here, you might have four accounts labeled Property Taxes, Car Tags, Vacation, Insurance Premiums.

The bookkeeping is certainly easier with separate accounts, but some like the idea of just having one additional account. Do what works for you.

Other Uses for “Sinking” Funds

Our “sinking fund” has graduated over the years to represent a sort of first-line emergency fund, in addition to a fund to cover annual expenses. We have a “Car Repair” fund, where I occasionally dip into for those hard-to-plan-for flat tires, dead batteries, early-summer air conditioner servicing jobs, etc.

We’ve also created a “Christmas Shopping” fund to plan for annual Christmas shopping for our family. This helps to smooth out these large, once or twice a year expenses so as to not upset the budget in the month in they occur.

Around Thanksgiving each year, we make out Christmas shopping list, gather up any coupons and deals we can find, and do our Christmas shopping within the budget established by the balance in the Christmas shopping fund.

We usually just put it all on a credit card for simplicity, and because much of the shopping is done online to score better deals (and because I hate crowded stores!). When the credit card bill arrives in December, we pay it off electronically from the Christmas savings account and avoid the debt hang over that often carried well into the New Year in years past.

What used to be a budget buster, like a car repair or home air conditioner servicing, is now just a blip in the budget in the form of an online transfer and a check for payment of services.

For large emergencies, our larger emergency fund is there. However, psychologically, I enjoy being able to handle smaller emergencies without dipping in the fully-funded emergency fund.

Since I was already planning to spend some time today updating things for August, I thought I would document the process here.

1. Update My Networth Spreadsheet. Each month, I take a quick look at a simple spreadsheet I created using Microsoft Excel. It first lists all of our assets, beginning with the most liquid (our emergency savings) to our least liquid, our home and vehicles.

After tallying up our assets I then list any debts we have outstanding like car loans and the mortgage.

Not many years ago, my liabilities section of the worksheet was far greater than the assets section, but I’m proud to say we’ve flipped that around. We are still in the beginning stages of building assets, as I alluded to in last week’s post, The Secret to Building Wealth Most People Ignore, so this process doesn’t take long.

While I am a fan of Mint.com, and use it to track our budget throughout the month, I still like to update my old spreadsheet at the end of the month because I have a number of different methods of tracking networth (including and excluding the house, vehicles, etc.). At least with Mint, I don’t have to bounce around to multiple websites to get the current value of our accounts.

2. Sweep the Financial House. If we’ve budgeted properly the last month, we should have a little extra in our checking account. If that’s the case, we simply sweep it out in the form of cash and splurge on something we’ve been wanting, but have not budgeted for.

The “reward” might range from a new book for every member of the family to a nice meal out, or some new electronic gadget, or maybe even a small piece of furniture for the house. It’s our way of rewarding ourselves for a job well done without harming the next month’s budget, and without going into debt.

3. Pay Off the Credit Card. We do this at the end of each month for expenses incurred that month and charged to the credit card. I know I could “float” these transactions another month or so interest free, but I like to start the month with a zero balance, and because we plan for it, the money is there in the budget to do so. If we go over our allotted budget, and add more to our credit card than we planned for, we move a little from savings to pay it off and move forward.

We don’t have to dwell on the credit card overspending – moving money from savings serves as our “slap on the wrist” for overspending on the card, and it motivates us to do better the next month to replenish the savings balance. I’d rather do that than pay interest.

4. Establish Big Goals for the Month. Each month, my wife and I sit down and set a big goal or two. “Let’s try to save half our income,” or, “Let’s make a $1,000 extra payment on the mortgage.”

Naturally, some months the budget just won’t allow for it, and this is the point where my wife usually reminds me. “Honey, it’s August. We have back to school shopping, the car tag renewals (which we only recently started faithfully saving for in a sinking fund), etc.” So, we’ll cut those big goals in half, but we do still set them so we have something to shoot for.

5. Establish Mini Goals for the Month. With the big stuff out of the way, now it’s time to focus on the small stuff (that usually adds up to big stuff). Each month, I look over our utilities, subscriptions, and other recurring expenses. Is there any fat to trim here?

• When’s the last time I tried to save money on the car insurance policy?
• Those Netflix movies have been sitting far too long on top of the DVD player, unwatched. Let’s scale back to a “one-disc-at-a-time” plan.
• We ate out quite a bit last month. Let’s make a goal to only eat out once a week as a family this month.
• The electric bill goes through the roof in the summer months. Could we try bumping up the thermostat a degree or two to shave a little off the electric bill?
• Thanks to higher gas prices, we blew the fuel budget again. Let’s car pool once a week to offset the additional costs.

These little cuts to our monthly budget categories help keep that bottom line from expanding. We make sort of a game of it – trying to live on less and less each month.

6. Create a Monthly Budget. We used to sit down once every few months and work on “The Budget.” However, we found more times than not we exceeded the budget established months ago because it didn’t account for a large, necessary expense in a particular category.

These days, we only plan one month in advance, and simply use last month (and the same month last year) as a guide. For instance, we know August is back to school time, so we increase the clothing budget from what we set for June and July. In September, the budget for clothes will again drop, and probably stay low until we start looking for winter weather gear later in the fall.

For us, there are just too many unknowns to set a number and try to stick to it every single month of the year. However, we can usually predict the next 30 days or so and create a realistic spending plan covering only that period.

7. Make Regular Savings a Priority. Before we do anything with income each month, we divert a portion of it to savings. Some months, we only make the “minimum” savings contribution.

By minimum, I mean the usual contribution to our Roth IRA accounts to max out each year, and the usual amount we have deducted for the kids’ college savings, and the established amounts we have automatically funneled to our sinking funds to cover annual expenses like car tags, vacations, Christmas shopping, etc.

We also make regular contributions to our emergency fund to save for emergencies, or as Chris from MyMoneyMakeover.com calls them, a “life blitz” (I’m a sucker for a great football analogy). Life does tend to blitz when you least expect it, and if you want to avoid getting sacked, you better have some great protection in front of you in the form of a solid offensive line, I mean emergency fund.

That’s it, in a nutshell. We normally spend about an hour or so performing these updates in preparation for the new month, and maybe another hour (cumulative) throughout the month updating transactions in Mint to reflect the correct category. It’s a fairly simple plan, but it works well for us.

What types of financial activities do you perform around this time each month?

Budgeting: Is it More About Yes or More About No?

Your perspective of budgeting is dependent on how you answer the question listed above.  There are some people who think budgeting is all about no.  No spending.  No entertainment.  No fun.  While any good must have its fair share of occasions where it says no, a good budget is not about saying no.  Instead, an effective budget is about appropriately using no to help you achieve a yes you would really like to accomplish in life.

A good budget must utilize the word no.

Consider the following illustration.  A man goes down to the river to enjoy an afternoon fishing.  A friend comes by and asks if he can use the river to wash his face.  Of course, the man is benevolent, so he allows the man to come and dip his head into the cool river.  A few moments later, another friend is passing his way and makes the same request.  All throughout the day the man provides strangers, friends, and relatives an opportunity to rinse in the river.  He is able to do so because the river provides an unlimited (to a certain extent) amount of water.

But a budget is not like the river because you are dealing with a limited resource.  Budgeting is more like a man with a pie.

A man goes to town to buy a pie.  As he looks at the pie, his mouth begins to water.  Then, as he prepares to take a bite, a friend passes his way and asks for a piece of the pie.  He quickly agrees and cuts the man a piece of pie.  Before long, there comes another and another until only one piece is left.  The man had told his family he would bring them pie, but there is no longer enough.  The problem is that by saying ‘yes’ to his friends, he indirectly said ‘no’ to his family.

Budgeting | The Yes and No Factor

Since money is a limited resource (in the sense that a dollar can only be used once before you must earn another one), each dollar represents the number of yeses we have available to use.  A man who makes $3,500 can say yes to 3,500 things that cost $1.  Beyond that number, he must say no.

The problem with North American culture is that credit cards and loans have made people believe that they have an unlimited number of yeses.  If they run out of money, they just go borrow more.

What if I say ‘yes’ too often?

If you say yes more than you can should, then you can improve your finances by taking away your ability to say yes when you cannot afford it.  As an example:

• While some people properly manage credit cards, others would be better off if they stopped using a credit card.  A credit card simply allows you to say yes to a purchase when you should have said no.
• Other people say yes too often when they go grocery shopping.  Limiting the number of trips you make to the grocery store would be a good way to remove your opportunity to say yes.

Each of us have occasions we say yes when we know we should say no.  A structured budget will help curb reckless spending.

I believe a written budget is a very important component of a financial plan. I’ve experienced it. I believe it’s important because with a budget you can predict and forecast when you want to say yes and when you must say no.  I want to say yes when it comes to family needs, so I budget.  I want to say yes when it comes to taking a family vacation, so I budget.  I want to have money to contribute to the church, so I budget.  I want to help pay for my kids’ college, so I budget.

A budget tells you when you should say yes and when you should say no.  Budgeting is not about saying ‘no,’ but about choosing when to say ‘yes’.

What do you think?  Is budgeting more about saying yes, or more about saying no?

I imagine many of you are like my wife and me. We get paid every two weeks. I get paid on Mondays and my wife gets paid on Wednesdays of the same week. So, that means we get 52 checks each for the entire year (combined). If you average those out per month, it is 4 checks every month except for 4 months where we get 5 checks. So, what should we do with the additional check in those months?

As it turns out, May is one of those months for us. I get an extra paycheck at the end of the month. Basically, we already spent the extra paycheck. My wife is going back for a graduate degree and we paid cash for the class that she is taking this summer. However, there are still a couple more months this year where it will happen again. Based on those facts, I came up with a few ideas of what to do with those extra paychecks. Feel free to mention some of your ideas in the comments!

Get Rid of Debt

Well, what did you expect me to say? For most of our extra paychecks, we are just going to put them on debt. It’s a great extra boost and can really help you gain some traction.

Save For Variable Expenses

We all have those variable expenses that seem to creep up on you at the wrong time. Those expenses can include car insurance, home insurance, taxes, gifts, etc. Placing your extra paychecks into a savings account specifically for those types of expenses will guarantee that they won’t surprise you when they become due.

Save For The Holidays

Have you ever wanted to pay for your Christmas gifts in all cash? Well here is your chance! Save those extra bucks specifically for this goal.

Just Spend It

This is the one that I do not recommend unless you are debt free. If you are, what’s wrong with a little splurge? How about that weekend getaway you have been dying to take? Want that new cell phone? Go and get it!

Open a Roth IRA

Use the extra cash to being (or continue) saving for retirement. The Roth IRA allows you to place after-tax money into an account that grows tax-free. That means when you retire you can take the money out and not pay a dime in taxes!

Go Back to School

This is something that my wife is doing. Her work pays for a part of it but we need to cover the costs up front. Using the extra cash to pay for the class ensures that we don’t go further into debt or rely on credit cards.

Save For a House

You could also use the extra paycheck to start a house fund. This will eventually be a goal for my wife and me but it is still a few years off. Heck, if you are debt free, you should also have a TON more money to set aside each month. We can’t wait until we get to that point!

* * *

Of course, all of this depends on your living only on two checks per month! What else can you think of?

Photo by robson2313

PAYGO requires new federal spending to be offset by budgetary cuts or tax hikes. Makes sense; without paying as you go you will surely wind up deep in debt, which is exactly how we find our country. As most things political go, PAYGO seems to be more for show, as politicians on both sides have ignored their own rules, or taken advantage of lapses in PAYGO, to spend like maniacs.

Since the idea of debt first came along, people have opted to borrow versus saving for a variety of reasons. Farmers often needed to borrow money for seeds and tools to produce their first crop. Many business were started with loans, because they had significant upfront costs that owners were unwilling or unable to cough up. Homeowners cannot usually afford to buy a house for cash, so we choose to take out a mortgage.

These examples all seem relatively easy to justify, but then a little tool came along called the credit card, which made it much easier for households to borrow money for everyday items. With credit cards, the idea of paying as you go became nearly obsolete.

Every now and then I hear stories of someone who built their own home. They often saved up to buy some land, then the materials, then completed as much as they could on their own while saving to pay someone to finish up those things they lacked the expertise or physical ability to do themselves. I’ve always admired these types; not only for their self-reliance, but because they understood the pay as you go way of managing your money.

My wife and have implemented PAYGO in our own household, on a smaller scale. A few months ago we agreed not to sign up for any new subscriptions, or add to our recurring monthly expenses, without canceling something equivalent.

For instance, after living for more than a year without cable television to speed up our get out of debt plan, we decided to sign back up for basic programming. Doing so would add about $30 to our monthly budget. To pay for it, we scaled back our Netflix membership (a $10 savings), canceled a weekend newspaper subscription (I can read it online – $10 saved), and I canceled a forums membership I no longer participated in (at $9.99/month).

In our example, we eliminated two things that were no longer useful to us, or that we no longer enjoyed, so it wasn’t too big a deal. However, we have had times where we wanted to add a new service or subscription, and couldn’t identify we were willing to eliminate. Enter the other side of the PAYGO equation: Increasing income.

The government can increase income by raising taxes. Fortunately, we don’t have the ability to levy a tax on others and collect their money, so we have to raise the funds ourselves through work. If you receive a raise at work, you may want to allocate a small percentage of your new income to adding something to your household that would add value.

Perhaps you’d like to listen to audio books on the road to increase knowledge on a particular subject. Or maybe there is a cooking class you’d like to attend, or a gym membership could help relieve stress. Whatever it is, use a small percentage of your new, monthly income to reward yourself. Notice I said “small percentage.” There is a risk here of lifestyle creep – inflating your lifestyle to meet or exceed your new income. Tread carefully.

By implementing a pay-as-you-go system in your personal finances, you will not only avoid debt, but you will be able to take pride in the things you own because you really own them, they don’t own you. And yes, that’s right out of Tyler Durden’s Guide to Personal Finances.

*This article appeared in the Carnival of Personal Finance – Tour of Ireland edition

If you’ve read my blog lately, you may have seen that I don’t live with my wife during the week. My current job is approximately 2 hours away. Because of the distance, I have to stay there during the week and then head home on the weekends.

There are many disadvantages of living away from my wife, both emotionally and financially. I won’t really get into the emotional stuff seeing that this is a financial blog. However, I can shed some light on how we handle our finances on a day-to-day basis.

First, let me give you a little insight into the added expenses. In order to stay in PA during the week, I have to pay for housing, groceries, parking, and fuel. All of those together add about $600 to our budget. Those are all in addition to what we already spend in MD. It’s definitely straining, but it’s better than me not working at all. My wife and I have been apart for long periods of time before (I went to TX for grad school) so we are used to being apart. However, it’s not something I want to do for more than a year.

Even though we are apart, we still need to make financial decisions as a team. Marriage is commitment and both partners need to have an equal say. Here is how we do it:

Communication Is Key

Just as the title says, communication is a key part in our financial decision making. We communicate daily about our finances on the phone and via Skype. We are constantly talking about our budget and how much we will have left over to pay down debt. We actually think budgeting is fun and are always looking for ways to save a buck just so we can pay off more debt at the end of the month.

Financial communication is a necessity is every marriage. If one partner is spending away while the other one is committed to getting out of debt, they’re not going to get far. You just need to sit down and talk about your finances. Heck, if my wife and I can do it every night when we are 2 hours away from each other, so can you!

Long Distance Budgeting

Almost all of my adult life, I have been a Quicken kind of guy. It was always easy for me to use and made my finances come together in one simple platform. Well, when we got married, I noticed one major flaw. It was only on my computer and it was really hard for my wife to understand how to use it. So, we made an executive decision to give something else a try. A written budget wasn’t really an option for us as we are more technical people. It would also be a little harder to keep track of being apart. Then came Mvelopes.

Mvelopes is an online based budgeting program that can be accessed anywhere (with an internet connection). Mvelopes is based on the envelope system which we thought was the best budgeting technique for us (and still do). It allows us to check our budget at the same time and discuss the different envelopes and what we spent during the week. It just keeps us on the top of our game. It also keeps us accountable.

Keep a Positive Attitude

It’s easy to get a little depressed when you are away from your spouse for extended periods of time. It’s especially hard for us since we were married only six months ago. However, we continue to be positive about our situation and are trying to get things straightened out. Currently, I have an interview next week for a job in MD working for the same company. If all goes well and I get the job, my income will increase about 10%. It will also eliminate our need for addition expenses such as the rent.

Well, hopefully you will never have to find yourself in my position. It’s tough,  but we are making it work. If you do find yourself in this predicament, hopefully these tips can help you out. These are actually good tips for couples who are living together too. You need all of these to manage your marriage and finances.

Have a great weekend!

Yes, budgets can set you up to succeed, or set you up to fail. Make them too strict, and you’ll never stay within a spending category’s limits. Have too many budget categories, and you’ll spend too much life energy hunting and recording receipts. Like everything in life, try to find some balance when setting up your budget, but err on the side of simplicity. Here are a few reasons why.

1. Strict budgets are as successful as strict diets, they aren’t. Ever tried to lose weight by drastically cutting calories or eliminating all foods you enjoy from your diet? Let me guess – you lost weight the first two weeks, had a slice of cake at a party, and derailed your entire progress.

Humans just don’t like big changes. We are more successful over a longer period of time when we implement small changes that continue to put us on the path towards reaching a larger goal. Like the old saying goes, you have to eat an elephant in small bites. But hold the butter, or you’ll have to go right back on that diet!

2. Strict budgets create money micro-managers. A couple years ago we took the kids to the Smoky Mountains, their first trip to see a hill over 300 feet high. My wife and I were enjoying the vistas along the Blue Ridge Parkway, but noticed our kids had their heads buried in a book, or their Nintendo DS, and were missing the scenic views. I spent a great deal of the time reminding the kids to look up at the overlooks. Sometimes they did, most times they didn’t.

That’s how adults who are consumed by managing their money appear. Our heads are buried in spreadsheets, or Quicken, and we forget to stop and look up at the overlooks. Pretty soon, we were off the Parkway and realize we missed an opportunity to see the sights; to stop and smell the roses.

3. Budgeting is boring. I confess; I just don’t like budgeting. I don’t like creating them or updating them. I realize they are necessary for proper money management, so I create one each month. However, I make it as simple and painless as possible. I haven’t always been this way.

When I was younger I had dozens of budget categories. Instead of a simple “Food” category, I had a category for meals out, snacks from the vending machine, groceries, etc. I meticulously tracked debit card (and at the time, credit card) purchases, and receipts to be sure I put the expenditure in the correct category. Oddly enough, this was also the time when I accumulated the most debt. In my attempt to be sophisticated, I failed to recognize and adhere to one of the simplest personal finance principles around: spend less than you earn.

4. Strict budgets limit opportunities. By opportunities, I mean opportunities to experience something or save money by buying something at a deep discount. How many times have you passed on something you’d really like to do, or really like to own, because it “wasn’t in the budget.”

It is almost as if the budget is controlling us, rather than the other way around. Then again, for the most impulsive shopper, that’s probably how it should be. But for those who have displayed discipline with their finances, a strict budget feels more like a tight-fitting jacket than a useful tool. It restricts us, and keeps us boxed in from the chance to live a little.

5. Budgets cause money fights in relationships. I saved the best for last. My wife and I don’t see eye to eye on the concept of budgeting. She is the free spender, and I’m the nerd, at least when it comes to finances (though she would probably say the nerd label extends further!). Early in our relationship I tried to force my elaborate budget system on her. It didn’t work. For a period we scrapped the idea of budgeting altogether.

These days, we have compromised and met in the middle when it comes to budget categories. Instead of including infinite layers of budget granularity, we now separate our money into larger piles of logically separated categories. Here’s a sampling from our monthly budget (I’m leaving out the amounts because I don’t want to get hung up on the numbers):

• Mortgage
• Utilities
• Food
• Auto
• Household Supplies
• Savings
• Debt Repayment
• Insurance
• Clothing
• Medical
• Entertainment

Our goal was to keep the budget at ten categories or less, but we did add one for entertainment. It’s hard to think of an expense that doesn’t broadly fit into one of the categories. Last month, we thought we ran into one such example:  birthday presents for kids’ friends. We decided to just take it from “Entertainment” for now, rather than create a new category for infrequent purchases (although I made the argument that friends’ birthdays seemed to happen at least once a month!).

Another way to combat budget fatigue is to create a number of sinking funds for irregular expenses. We’ve done this in our household. Notice in the budget above I’ve simply listed “Savings” as a top-level category. That represents a single transfer to our ING Savings account, but from there the money is split into several “buckets,” or sinking funds.

We have a sinking fund established for things like the annual renewal of our car tag, the semi-annual payment of our auto insurance, Christmas shopping, vacations, and a couple others. When these expenses come up, we transfer the money from the sinking fund and write a check. No impact on the monthly budget.

I have written this post with sort of a negative spin on budgeting. I hope that’s not what you will take away. Rather, I’d like for you to take away the idea that by making your budget too complex you are setting yourself up for failure. I urge you to consider consolidating categories, or setting up sinking funds, or allowing yourself more “fun” categories so that you can enjoy life. And please, remember to look up at the overlooks!

Unfortunately, no magic debt eraser exists, but like I tell my son, “let’s pretend.” Let’s pretend for a moment that you do not have any debt. How much different might your budget look?

That’s the idea behind creating a dream budget, an exercise I have toyed with informally a few times, but was sold on after reading a post at Enemy of Debt. Here’s how I created our “Dream Budget.”

1. Grab a copy of your most recent budget. Highlight the amount of total expenses, total income and any savings contributions you are making.
2. Make a second budget minus any payments related to debt. Leave the mortgage payment for now, but remove credit cards, student loans and car payments.
3. Using this new “dream budget,” calculate the difference between total income and total expenditures. This difference is the amount you are spending each month to service debt.
4. Find a new home for the difference. What will you do with this new excess? If you are like most families with a $400 car payment, and several thousand in credit card debt, you could easily free up $700-$800  a month by paying off debts.
5. Break out “savings” category into more targeted goals. Finally, there is enough money to invest in a Roth IRA, save for the kids’ college tuition, put a little away towards a replacement car, and maybe even a little towards a down payment on a new home.

What’s standing between you and your dream budget? Debt. Debt is like a soul-sucking black hole in your financial world. Being in debt is worse than the worst job you’ve ever had, and the worst relationship you’ve ever been in, combined. To put it bluntly, being in debt sucks.

Most of us are aware of this fact, at least intellectually, but by creating a dream budget you finally have evidence of the things debt is robbing from you with each required payment, and it has a way of getting you fired up, emotionally.

Consider just the interest accumulation on your debts. How would you react if your bank was reaching in and grabbing $148 a month out of your checking account? You would be outraged, and rightfully so! Well, that’s the equivalent of allowing credit card companies and other loans to tack on interest each month on a large balance of debt. Get rid of it once and for all, and free your budget up to do bigger and better things.

Keep this dream budget handy if you feel motivation for your get out of debt plan waning. It might just be the kick in the pants you need to get back on track and make your dream budget a reality.

When the time comes to set up your debt free budget, consider using Mvelopes to create a virtual envelope budget.

Budget Committee Meeting Minutes

Balance checking account.  The first item addressed is our checking account, which by this point in the month could usually use a quick balancing and reconciliation with our online account.  We make sure all outstanding checks are accounted for before “closing out” the month’s final balance and begin tracking the new month.

Review last month’s budget.  It is also at this point that we perform a final review of our budget categories together to determine where we missed the mark, and where we were successful.  The review for March revealed I spent too much money on eating out.  My excuse was that I was on the run a lot visiting my mom (who remains hospitalized), but really that’s a poor excuse – I could have packed something to eat or waited until I got home.  Sometimes you just can’t account for everything when setting a budget a month in advance.

Update personal balance sheet.  If we have stuck to the plan this part is always something to look forward to, but if we have spent more than we should, or not saved as planned, we usually dread this review.  Take an inventory of all your debts and update their balances in whatever format you use to track your net worth.  We use a simple Microsoft Excel worksheet with a column for each month and a list of debts and assets down the side.  Looks like we are on track as our debts continue to get smaller, and our savings continue to grow.

Modify budget amounts for next month’s expenditures.  Some months we just carry forward the budget amounts from last month, but it’s rare.  There always seems to be something happening, especially when you have kids in school.  Yearbooks, camp registrations, clothing, and spring pictures were all mentioned yesterday and affected a couple categories.

When my wife and I first married I handled all of the bills by myself.  After a couple years my wife began to take a passive interest in the finances, but was never particularly interested in knowing all the gory details of debt, account balances, etc.  Basically she just wanted to know how much was in the checking account at any given time.  I recognized that to pull off our financial turnaround I would need her support, and started holding these monthly meetings to discuss our finances.

At first the budget meetings seemed like a chore, but over time my wife enjoyed having input in the process, and I certainly appreciated her input.  With us working together we were blindsided far less by unexpected expenses.

If you are not currently doing something similar with your spouse, I highly recommend sitting down tonight and reviewing finances together, even if it means missing the latest episode of Desperate Housewives.  That’s what TiVo is for!