Tuesday, October 16, 2012

How we manage our money

This past week, I posted this on Facebook:
145 interactions?  Never seen that before.

That is, without a doubt, my most-interacted with bit of social media ever (Wolfram Alpha agrees).  I was stunned to see the number of people who liked it.  We didn't get that much interest when announcing the birth of our kids!  While I'm positive that many of those folks are already debt-free and are recognizing the work of a fellow-traveler, I also expect that many of the "likers" (is that a word?) are hungry for the same thing we're experiencing now.  I've had several people ask for an explanation of how we handle our money.  This is it.

I should point out that I am hardly a personal finance expert.  If I were smarter or better with money, we wouldn't have added that debt in the first place.  Today, I make $10k a year less than I made eight years ago when I was 24.  You'd think that the early earning power would have given me a massive head-start, but instead it set us back.  I got used to out-earning my poor decisions, which ended up being a problem when my earning potential decreased.  Engineering firms pay better than churches.  Who knew?

I've been hosting Financial Peace University at our church, and I've been watching people struggle with their budgets.  I really like Dave Ramsey, and his principles are solid.  But his budget forms are really difficult for me.  Too much work.  Judi and I have migrated to an easier system that's worked well for us.  I called into his show and asked him what he thought, and he said MY approach seemed like too much work.  To each his own, I guess.  But here's what we do.

We've totally stopped using credit cards, and minimized debit cards (except for gas).  We've stopped worrying about accruing points; we've found that the amount we save when paying cash is much more than we were getting for our points.  We keep our cash in envelopes and only use cash for most purchases.  We use envelopes for groceries, clothing, special projects, and a mini-emergency fund.  So far so good, Mr. Ramsey would say.

Each one of these gets its own number

Here's where it gets odd:  we found that envelopes work so well that we use electronic versions for our non-cash expenses.  We budget based on three checking accounts:  a general account, a housing account, and an auto account.  The general account is the primary fund.  It gets the paycheck, pays the debt, and transfers money to my other accounts (both checking and savings).  It's kinda like what Ramit says, except I don't use credit cards.  Every payday, money is also transferred to my housing account and auto account.  The housing account pays the mortgage and all utilities, all of which auto-drafts.  We should have a little bit of extra money in that account every month, and we let it build up and we use it for projects.

An example of a sub-budget (housing, in this case)

The auto account is the same.  Every two weeks it gets half of my monthly budgeted amount, and it auto-pays our insurance.  We also have a separate debit card that is only for gas purchases; it's hard to impulse-buy when you're only buying gas.  Every month a little extra money builds up, which we use for basic maintenance like oil changes.

We also use four savings accounts:  one at our bank (with our emergency fund) and 3 at ING, which I love.  If you're interested, let me know and I'll refer you... I think I get $10 for referring someone.  We have mini-savings accounts through ING for gifts, vacations, education, and so on.  I don't know if I could make ING my primary account, but it sure is nice to have as a supplement.

It's not rocket surgery, but this works for us.  I'm always open to improvements... do you have any tips to share?