The Conflict-Free Family Budget: Our Plan
Hereâ€™s the complete rundown of the new budget agreement I worked out and proposed to Jak last June.
First, I started with by calculating our net income from a single day job. (At the time it was me working and Jak at home; more often itâ€™s been the other way around, but either way weâ€™ve been on a single income since late 2008.)
Then I started thinking about what expenses were absolutely necessary. Like, if we suddenly had no income whatsoever, what would we still have to keep buying or paying for? I came up with the following list of Needs:
- Rent or Mortgage
- Natural Gas
- Health Insurance
- Car Insurance
- Car Maintenance
Some of those categories are straightforward, but a few could use further explanation. For example, â€˜Phoneâ€™ could theoretically mean anything from a local-only landline to dual smartphones with unlimited data. We have a free VOIP phone setup at the house, so I thought if necessary Jak and I could share a single cell phone on a pay-as-you-go plan. (In June I calculated the cheapest option to be $22 per month, including taxes and fees, using a â€˜dumbâ€™ LG phone that we already own.)
For some people, â€˜Internetâ€™ would be properly a luxury, but since neither Jak nor I can do any work — salaried or freelance — without it, for us itâ€™s a need. â€˜Groceriesâ€™, for simplicity of recordkeeping, includes all necessary consumables — not just food but also things like dish soap, toilet paper, toothpaste, and pet food.
Gasoline was the one area where I opted not to be draconian right out of the gate. To be strictly accurate, we should keep mileage logs and distinguish between required and discretionary trips … and if it ever seems like weâ€™re overusing the car, thatâ€™s what weâ€™ll do. But between frugality and environmental concerns (and, it could be argued, a homebody lifestyle), Jak and I have been pretty good about keeping our driving to a minimum. An employer-paid bus pass is usually a job perk for us; without that, weâ€™d have a Public Transportation budget as well.
After tallying up the Needs, I moved on to Savings. Jak and I agree that maximizing our tax-advantaged savings each year should be a priority, which in our circumstances means:
- 401(k) (when available, up to the employer match)
- IRAs for both Jak and myself
- HSA for the whole family
Taking our single net income and subtracting all of the above left us, as of July 2011, with $570 per month. This is what we would allocate to our familyâ€™s Wants. The next step was to distribute that discretionary money into â€˜accountsâ€™ for each family member. We started with the children.
Jakâ€™s elder daughter graduated last year and moved out over the summer, so weâ€™re no longer financially supporting her. However, we agreed to jointly allot $120 a year — $10 a month — for gifts and other help.
My younger stepdaughter still lives with us half-time. Most of that cost is already wrapped into our Needs — a larger house, utilities, medical, groceries — but that still leaves clothing, restaurant meals, gifts, entertainment, extracurricular activities, and random optional expenses like school yearbooks. I proposed $50 a month for Claireâ€™s discretionary budget; Jak worried that wasnâ€™t enough. We compromised on $60 per month, or $720 a year. (This is for half of her expenses; her mother is responsible for the rest.)
Whatever was left over after Needs, Savings, and the kidsâ€™ Wants — in this case $500 — Jak and I split. (The precise amount adjusts up or down as income or Needs expenses change, but itâ€™s remained pretty close to that number.) That $250 is ours to spend however we want, no questions asked, no unsolicited opinions expressed.
Itâ€™s worth calling out some of the things that are considered optional and so fall under the personal budgets. In every case, my touchstone was â€˜If we suddenly dropped to zero income, would we need to buy this thing anyway?â€™ We arenâ€™t just talking restaurant meals and entertainment, but also such things as:
- beauty products
- sports equipment & fees
- charity donations
- cell phones
- small appliances
- kitchen equipment
All of the above comes out of our personal $250. (We each get an $11 credit against our monthly cell phone bill — half of the $22 I calculated above.)
The only things not covered in this setup are major random emergencies; those are handled separately. For unplanned medical expenses, we have the Health Savings Account; for everything else, we have savings in a separate emergency fund. So if the water heater suddenly dies or the car transmission fails or someone breaks a leg, we can cover the cost without accruing any debt. This is critical; if we didnâ€™t already have a solid emergency fund we would need to cut our personal budgets back until we had built one up.
The final piece of the puzzle involved assigning responsibility for budgets other than our own. Most of the items on the Needs list are fixed costs; thereâ€™s not any discretion involved in paying the mortgage or the electric bill, and things like Internet service and auto insurance only need to be price-checked two or three times a year.
However, groceries is our largest monthly expense after housing, and it involves a whole bunch of decisions on at least a weekly and sometimes daily basis. In our case, we agreed that I would be the sole arbiter of the grocery budget. I do almost all the shopping anyway, because Jak dislikes it … and while I wouldnâ€™t say I love it, I donâ€™t mind it so much. Not coincidentally, I have a lot of practice at being both thrifty and efficient, and I also do all the cooking, so Iâ€™m the best person for the job in more ways than one. This doesnâ€™t mean that Jak canâ€™t buy doughnuts on a whim if he wants, just that if he does so without getting my approval first, he risks having to pay for it out of his $250 personal budget instead of Grocery.
And last but perhaps most importantly for us, the kidsâ€™ budgets. Previously, a fair percentage of our financial disagreements revolved around spending on entertainment and other luxuries for the kids — with me, unsurprisingly, on the side of â€˜lessâ€™ and Jak on the side of â€˜moreâ€™. (In some of my research on stepfamilies a couple years ago I discovered that this was a typical pattern for divorced parents and especially for fathers: for emotional reasons they tend to spend significantly more on their childrenâ€™s gifts and entertainment than parents who are still married to each other — despite the fact that two households means higher expenses and generally less money to go around.)
Because of this dynamic, I proposed that Jak have full control over the kidâ€™s budgets. I could offer suggestions or opinions, but the decisions would all be his. And if he wanted to spend more than the agreed-upon amount ($720 for Claire or $120 for Michaela), he could — out of his own discretionary budget. (As could I, if I wanted to buy something for either of them that he didn’t agree to.)
So to recap, the system in a nutshell is this:
- Calculate one after-tax income
- Subtract bare-bones Needs
- Subtract priority Savings
- Apportion a reasonable amount to cover Wants for each child
- Divide the remainder by the number of adults
- Assign each decision-heavy budget to a single adult
(The Needs/Savings/Wants trichotomy was influenced by a great many things, but particularly the book All Your Worth: The Ultimate Lifetime Money Plan, by Elizabeth Warren and Amelia Tyagi. However, I took the concept a lot farther than the authors did.)
We also made one other agreement, about how we would handle extra income if we both are working simultaneously: at least 50% of that second paycheck will go automatically into long-term (retirement) savings. The other half will be negotiated when it happens, going into some combination of long-term savings, short-term savings (e.g. for major joint travel expenses), and/or a bump to our individual Wants budgets.
Next post, Iâ€™ll describe how itâ€™s worked out for us over the last six months.