pocketmint

On January 31, I sat down at my computer with determination. This year, I would not wait until April. This year, I would calculate our taxes early. No 1040EZs here — we have complicated taxes that take hours and hours. Nevertheless, I was resolved to be done before the stroke of February.

Are you laughing yet?

Now, it so happens that I sold stock for the first time ever in 2011.

When I was hired at ShareBuilder in 2006 they waived transaction fees for purchases in employee accounts. (There would be fees later, when I wanted to sell, but I didn’t think about the implications of that at the time.) I was just starting to learn about investing, and certainly didn’t have anything resembling a comprehensive strategy, so for the next two years I bought tiny amounts of whatever ETF looked good at the time, and let them sit there.

And then came the market crash of 2008. It wasn’t a lot of money to begin with, and suddenly it was a whole lot less. I didn’t want to think about the losses, so I pretty much just ignored the account for another couple of years.

(Want to know how naive I was? I bought a bank ETF in November 2007. Oy. Well, at least it was only $50.)

In early 2011, having learned a great deal more about markets and investing, I was consolidating and reorganizing our retirement assets under a new strategy, and I decided it was time to bite the bullet and jettison all those random ETFs.

So I sold them all. Nine different funds, each with a $7.95 trading fee, all but one of them at a loss. Ugh. But at least that was one less mess to deal with going forward.

And now it’s January 31, and I’m all gung ho to finish our 2011 taxes, and I’m zipping around to various websites downloading PDFs of our tax forms, and I get to ShareBuilder and …

No tax forms. I poke around for a while, and eventually find the message:

“The Emergency Economic Stabilization Act of 2008 changed the IRS reporting deadline for brokerages to February 15.”

The what now? Oh, the bailout bill, the one that led to TARP. Among other things, it requires brokerages to report the cost basis of stock transactions starting in January 2011. And extends the brokerages’ deadlines for all forms, even 1099-DIV dividend reports, for an extra 15 days.

I’ve never had to report a capital gain or loss before. (You only have to worry about those in taxable accounts, not retirement accounts like IRAs.) Those nine different ETFs were the result of 37 different buying transactions (I counted) — some little purchases of $25 here or $50 there, some mere pennies where I had dividends set to reinvest.

‘Cost basis’ gets complex when you reinvest dividends. I wasn’t about to bet that I could get the calculations right without the tax forms to work from. This new complication — on top of our usual mess of Schedules K and SE and stacks of teensy 1099s — caused my resolve to just shrivel up and disappear.

So you’d think, okay, that’s not really a big deal, right? Just wait a couple of weeks and do your taxes then.

Except.

My stepdaughter is applying to college for fall 2012. The FAFSA (Free Application for Federal Student Aid) requires AGI and other data from parents’ 2011 tax forms. And one of the schools she’s applying to has a FAFSA filing deadline of …

February 15.

Awesome.

Jak sent me an article on CNN Money that warns, “Estimating [your 2011 taxes] for the FAFSA can backfire.

“For example, your year-end pay stub may not account for 401(k) contributions, causing you to overstate your adjusted gross income. And every $10,000 you add can reduce aid by $4,000, according to FinAid.org. While you’ll eventually have to follow up with your 1040, by the time any mistake is corrected, you may have missed out on some aid.”

This is because most student aid is awarded from a finite pool of money on a first-come, first-served basis starting January 1. If you’re late to the party, it doesn’t matter how great your need is.

In our case the mismatch between federal tax reporting deadlines and school aid application deadlines hasn’t left us any choice: we have to estimate. I guess I’ll just aim on the low side, and hope.

Now I just have to see if, come February 15, I can find my determination again. I’m sure I left it lying around here somewhere.

In creating the Conflict-Free Family Budget, I was striving to accomplish two separate but interlinked goals: reduce spending and reduce conflicts. I think these work best in tandem, but that’s not to say that you wouldn’t derive some benefit by implementing just one or the other. I’ll try to tease them apart here for that purpose.

Goal: Reduce Spending

Below are the five most important pieces for the frugality goal, followed by some additional tips for each:

1. start from one income
2. redefine Needs vs Wants
3. calculate Need expenses
4. prioritize Savings
5. take Wants out of the leftovers

Start from one income

As I mentioned, Jak and I have averaged one paycheck between us for more than three years, so it only makes sense that we budgeted from a single net income. However, if you’d like to implement this yourself and your family currently has two incomes, I recommend you still run the numbers with just one.

The reasons why would make a whole separate post — one which I will definitely come back to later — but for now, the basic idea is safety in uncertain times. If you can manage to treat that second income as optional rather than necessary, you’re dramatically improving your ability to cope with large economic disasters. If you absolutely cannot make it work with one person’s paycheck, then get as close as you can for now … and then look for ways to change your basic situation so that one is enough.

Redefine Needs vs Wants

I suspect that some people may balk at the slightly radical idea of putting items like housewares and furniture and clothing under Wants rather than Needs. Because I mean, we need something to eat food from and something to sleep on. Plus I’ve been told nakedness is frowned upon in polite society.

It’s also a fair point that our family went into this system pretty well-stocked already. We aren’t building a household from scratch, just replacing things that get worn out or break, or adding things that we like better than what we already have. However, I don’t think this invalidates the principle, for two reasons.

One, most people reading this will, like us, already have the bare minimum of necessary clothing and housewares (in fact, given the emphasis on consumerism in American society today, I’d wager nearly everyone will have a great deal more than they actually need — we certainly did).

Two, even if you are just starting out — say, leaving your parents’ home for the first time, or establishing a new household after a breakup or divorce — placing things like ‘housewares’ and ‘furniture’ in the Wants budget rather than the Needs budget will help you avoid the trap of overspending on items before you can afford them. A few plates and bowls are a reasonable necessity, yes, but you can get them for fifty cents apiece at Goodwill or a yard sale. Need something for visitors to sit on? Pick up that ugly-but-comfy-and-free couch off Craigslist for now. Then save some of your discretionary dollars each month until you can afford to upgrade to the 40-piece matching dinnerware or the leather loveseat … if you still want them.

Calculate Need expenses

Most of the expense calculations are straightforward, but I wanted to touch specifically on two things.

First, debt. We ignored debt in our calculations because (aside from the mortgage) we don’t have any. But if your household is carrying consumer debt, you’ll need to add minimum payments into your Needs budget.

Second, the Grocery budget. After housing, food will (or should) be the single biggest expense category for most people.

It also has vastly more decision points than any other type of expense, which makes it a very elastic category. Hand two people a grocery list of basic items, and depending upon which store(s) they choose to go to and which exact products they choose to buy, the cost could differ by a factor of four.

With such wide variations, you might wonder how you determine what is a reasonable amount to spend. I certainly did. Turns out the US Government has us covered.

The USDA offers four levels of ‘Food Plan’, designated (from least to most expensive): ‘Thrifty’, ‘Low-Cost’, ‘Moderate-Cost’, and ‘Liberal’. The Thrifty Plan is used to calculate food stamp (SNAP) allotments; the Low-Cost Plan is used by bankruptcy courts to allocate food expenses. (The Liberal Plan — which clocks in at roughly double the expense of the Thrifty Plan — affects the meal allowance for military personnel, and any of the plans may be used by courts in cases of alimony, child support, or foster care.)

In our case, once Michaela moved out in September, our household consists of one 19-50yo female, one 19-50yo male, and one 12-13yo female (half-time). The Thrifty Food Plan for our household (using June 2011 numbers and taking half the allotment for Claire) adds up to $443 per month. Mind you, that’s meant to cover food alone — no soap, no toothpaste, no toilet paper. I also checked the cost of living in Seattle against the national average; food in Seattle is 10% more expensive, which brings us up to $487.

Now, though I had been categorizing expenses a little differently before this budget, I was confident that I wasn’t going to need that much. In the end, I decided $450 per month would be plenty for our Grocery budget.

How’m I doing? Well, first of all, we are still eating very well, including an 18-week subscription to a local CSA each year — a distinctly non-frugal choice, but important to us for ethical reasons. Without the CSA, I’m averaging $283 per month; with the CSA (annualized), our monthly cost is $332. So even with all our nonfood consumables (like pet food and soap), we’re still beating the ‘food stamp budget’ by over $100 per month.

I find this both reassuring (that a food stamp allotment would more than cover our actual food expenses, if we ever needed it) and appalling (because now I’m wondering who the heck spends at the ‘Liberal’ level and why).

Anyway, I think an extremely safe target formula for a frugal-minded family would be: the Thrifty Food Plan amount for your household times a cost-of-living multiplier (note that if you live in a cheaper-than-average area this will actually reduce your budget). Rock the leet frugal foodie skillz and you can do a lot better than that.

And if keeping expenses down is less of a concern, you can use the Low-Cost numbers instead; they’re roughly 30% higher.

Prioritize Savings

Please don’t make the mistake of stinting on the Savings portion in order to increase your percentage of Wants. It’s particularly tempting if you’re making decent money but you hate your job — you may think you deserve more perks because you work so hard, or that you need more luxuries just to survive the job stress. (Believe me, I’ve been there.)

But there are better ways to combat job stress or unhappiness than buying more things — in fact, there’s a whole pile of research that shows buying more things isn’t even particularly effective at making you happier. And those savings? That’s what’s going to eventually give you the freedom to choose work and working conditions that will genuinely make you more happy. The more you save, the faster that day will come.

At the very least, take all of the tax-advantaged retirement and medical savings that you are allowed. Also make sure you have a solid emergency fund — enough non-retirement savings to cover six months of expenses. (If that seems like too much, consider that the average length of unemployment in the US today is nine months.)

Exception: if you have consumer debt — such as credit-cards or an auto loan — you should be paying it off as quickly as possible — probably, given typical interest rates, even before pumping up your emergency fund.

Then, if your family is debt-free but has a second income (because remember, we’re calculating with just one income here so far, right?), save most of that as well.

Why? Well, without going into too much detail here, because most Americans aren’t saving nearly enough to cover our own retirement. If you’re not putting away at least 20%, you’re likely in trouble. Some late starters need to be saving 50% or more in order to properly fund even a modest retirement.

Take Wants out of the Leftovers

This is the part where I admit an exception to the rule I laid out just above.

If you’re really serious about living within your means, you will restrict your non-vital expenditures to the amount you have left over after everything else — including substantial savings — is accounted for.

However, it’s also psychologically critical that you have some budget for extras. If you’ve been dramatically overspending until now, and the budget numbers just aren’t working out for you, simply eliminating the Wants category altogether is not a valid solution. It might work in the very short term as an emergency response, but it isn’t sustainable — in the same way that an extremely restrictive diet gets great results at first, but inevitably people backslide and end up worse off than when they started.

If you have a second income, you can tap into that to augment your Wants. If you’re already accounting for your total income and you’re still in the red, you should probably allot 5% of your net income to Wants (total for all family members), even if it has to come at the expense of Savings.

Just consider this a temporary condition, while you look for ways to lower the cost of your Needs, or increase your income, so that you can afford both Savings and Wants.

Goal: Reduce Conflicts

Jak had been grumbling about the lack of autonomy in minor financial decisions off and on for years before I really gave it much credence. After all, I was coping okay with joint decision-making, so I figured he just needed to learn how to be comfortable with less control.

But then I started studying behavioral economics, and learned exactly how large a role autonomy and control play in basic human happiness. I mean, to the point that giving nursing home residents control over a houseplant substantially reduces their death rates.

Oh. Um … sorry, sweetie? Here, have a houseplant …

(What I’d failed to take into account was that I already exercised a lot of uncontested autonomy over our grocery budget. Plus Jak was much less likely to object to my unnecessary spending — I don’t think he ever once suggested that perhaps we didn’t need new sheets. So we weren’t really in comparable positions, control-wise.)

But buying into the idea that he needed more autonomy didn’t automatically solve our problem. I could have just given him an arbitrary monthly amount to spend as he wanted, which in fact was a solution Jak suggested some time ago. By itself, though, that idea didn’t reduce my concern over our expenses. Because my (admittedly self-imposed) mandate was to Be Frugal About Everything, merely putting a cap on the amount that Jak could spend frivolously wasn’t going to stop me from feeling bad about every dollar of that amount. Plus I didn’t see anything preventing us from switching from debating individual purchases to an ongoing tug-of-war over the amount of his discretionary budget.

The critical piece for me was finding out what we genuinely had available to spend on extras, which is where the Needs/Savings/Wants calculations came in. That, in turn, allowed me to give myself permission to take a personal budget of my own, which helped satisfy my need for fairness.

The thing is, even if (like me) you think you’re doing well enough without your own little financial fiefdom, you’ll likely find that it’s more pleasant to have one, as I described in Our Results.

Most couples have conflicts around money because most couples are not exact matches in financial style. There’s almost always one who spends more and one who saves more. (It’s not always the same person, either — sometimes the saver in one area will be the spender in another.)

If you and your partner are having arguments about spending, this could be your answer: have the saver calculate a reasonable budget for that category of expense, and then give full control over the specific decisions to the spender. (You can wrap this into the spender’s Wants budget, as we’ve done with housewares and electronics, or you can track a separate budget, as we’ve done with kid expenses.)

Then enjoy all those minutes and hours that you no longer spend arguing!

Our new budget system accomplished everything I hoped for, and then some. Still, I’ve been surprised by a thing or two about my own reactions, and even more so by Jak’s.

I fully expected that for at least a month or two I would have trouble not bumping up against the $250 limit, especially since Jak and I had been averaging between $250 and $300 per month on restaurants. (Mind you, that was down from a high of around twice that much, a few years ago when we were both working full-time.) Food has always been more my priority than Jak’s; I suspected he would prefer to spend his money on things like sports and music and electronics, which meant that I needed to be prepared to pick up the restaurant tab if I wanted company.

What actually happened was that the moment the new system went into effect, I clamped down on my spending more than I would have believed possible. That first month, my only restaurant expenditure was $6.54 to Chipotle. I spent $104 overall out of my $250 (and $24 of that was involuntary, to pay for a library book that was inexplicably sucked into some parallel dimension). Nor did I feel deprived; what I felt was more like ‘burning determination’.

Apparently, having a substantial cushion in my personal budget was more important to me than anything, even sushi. Who knew? At the end of the month I rolled over almost $150 unspent. The next month I did go out to eat, carefully, but still rolled over $260. Six months in, I had accumulated a surplus of almost $700 … and that’s through a major family vacation and Christmas.

Once I had a few hundred dollars banked, I stopped getting a big high from underspending and watching the cushion grow … but I still haven’t felt compelled to spend any more. My expenditures have been pretty steady since month three, at around $150-$170. We have been going out to eat about once a month, less than at any point since at least the early nineties. With our restaurant outings so infrequent, Jak has been happy to pay his own way.

I should say that it surprised me only that I got to this point so quickly, not that I got here at all. One of the many things I’ve studied in the last few years is the psychological phenomenon called ‘hedonic adaptation’. This could and probably will fill another entire post in itself, but the basic idea has to do with the way your brain resets its baseline for happiness. Knowing how that works, I’ve been able — with surprisingly little effort — to derive about as much subjective delight from one restaurant meal a month as I once got from four, or ten.

Other things have had exactly the effect I intended. When I set up the budget rules, I was thinking very specifically about ways to counteract our specific personal spending flaws — my own no less than anyone else’s.

One thing I wanted to do was lower expenditure and consumption of alcohol. I cut way back at first, then ramped back up a little once I had saved a solid cushion. I can’t make a precise dollar comparison because previously I didn’t track wine separate from groceries, but I’m definitely spending less. When we do eat out, I’ve rather easily adapted to having just one cocktail or glass of wine with dinner instead of two or three.

Before The Budget, I judged that my biggest remaining financial weakness was buying housewares that, upon reflection, weren’t strictly necessary. I had been successful at not spending frivolously on myself, but I’d left some kind of psychological loophole around buying things ‘for the house’. If the pillows got a little flat, the sheets a little discolored, the towels a little stiff, then whoosh — I was off to buy new ones. On sale, of course, but true thriftiness would have required that I keep using the still-functional ones we already had. I wasn’t quite as impulsive about kitchen equipment, but there was room for improvement there too.

I hoped that by making all these purchases part of my finite personal budget, I could force myself to evaluate them more realistically. So far in the last seven months I’ve stayed entirely away from linens, despite long since passing the point where I would ordinarily have swapped in a new set of bath towels. (Jak had a minor mishap in the laundry room with some bleach … and I’ve just been living with the spotty results. Go me!) I have purchased a few items for the kitchen, but with even more care than before. For example, I wanted more than the two wineglasses we had, but filled in with 50-cent ones from Goodwill instead of buying a whole set of new ones at several dollars apiece. When I decided I wanted to experiment with a slow cooker, I spent $33 on a new one … but only after looking for a used one for several months and not finding what I wanted. (And then I made darned sure to send in the $5 rebate.)

I haven’t really been tested on bed linens yet, as I happened to have bought a new set of sheets (yes, on sale) last spring. I honestly don’t know what I’ll do when I start to feel like replacing them. I may yet buy new linens when we don’t strictly need them. I mean, few things give me more personal comfort than a really nice bed, and it might turn out to be just that important to me. But at least it will be a thoughtful purchase; I’ll be weighing the pleasure of new sheets against everything else I could do with that money, instead of fooling myself that it’s ‘for the house’ or ‘for the family’ and so doesn’t really count.

So what else have I been doing with my money? Well, among other things, I’ve given small amounts to a political campaign, to a Kickstarter project, and to a homeless person on the street — all things I didn’t do before. I suppose I had felt like I’d need to get Jak’s agreement first, and those are difficult things to rationally justify. Unlike him, I hadn’t felt particularly restricted by our prior arrangement, but apparently it was constraining certain decisions without my realizing it.

Jak’s spending patterns have transformed under the new system too.

Where I covet bed linens, Jak covets electronics. Smartphones, big-screen televisions, e-readers, speaker systems, computer monitors … Before the CFFB, I would get nervous every time he would drool over a new gadget; I felt like I had to squash his enthusiasm right up front with reminders that we didn’t really need whatever shiny new thing he was looking at.

I would never have imagined that, given a budget of his own, he would go seven months without purchasing a single electronic gadget. But here we are. He doesn’t buy music or dvds like he did before, either, making more use of the public library instead. And remember when I couldn’t get him to stay under $30 per month at coffee shops? Now he’s down to an average of $5. In fact, the only area of Jak’s spending I correctly predicted was soccer team fees and equipment, and even there he gets nearly everything from Goodwill.

He’s saving about 20% of his personal allotment overall. He, too, likes having a cushion in case something expensive comes along. When he spends big money, it’s mostly on extra trips — one to Glacier National Park with Claire; another solo jaunt down to Portland to visit Michaela after she moved.

But really, he’s turned into just as much of a frugality freak as I am. Which I didn’t anticipate at all.

Here’s Jak’s perspective, in his own words:

“I liked the idea of the new budget because we would be saving money and I would have the freedom to spend on myself and the kids without discussing every purchase every time. I knew that the independence would make me happier; what I didn’t expect was that I would actually spend less than before. When I was buying things with ‘joint’ money, I was less diligent about cost — less likely to try to think of ways to do things frugally. Turns out being frugal makes me happier most of the time, but I can still be extravagant about something if my budget can afford it. It’s liberating.

“I’ve discovered that I’m not spending all my monthly allotment; it’s piling up on ‘normal’ months and then I use a lot of it all at once for something big, like a trip or an expensive experience. I didn’t really understand this about myself before, but now I have a lot more data on my own spending habits. That’s cool too.”

One other surprise for me has been a small but noticeable change in how I feel about gifts from Jak. For the first time in over a decade, I am able to accept a gift from him without also worrying about the cost. Partly this is, I think, because he’s being more frugal in his choices; partly it’s that I just don’t feel responsible for everything anymore. When gifts came out of this undefined cloud of resources, I always had to worry whether that money could have been better spent elsewhere.

Also, when Jak has a finite amount that he can spend on himself, and he chooses to take some of that and spend it on me … well, it feels like more of a sacrifice, and somehow seems to mean more.

The same phenomenon means I actually get more pleasure from spending money on Jak, too. For example, I’ve long been buying most of his clothes, because it’s not the sort of thing that he thinks about; if it weren’t for me I think he’d wear the same jeans and t-shirts until they were more holes than cloth. (Metrosexual he is not.) But when I bought him a nice new (well, used from Goodwill, but new to him) pair of jeans last month, I definitely felt more pleased than in times past. I think it was because of my implicit sacrifice.

But the absolute best part? Is that we don’t argue over spending on the kids anymore. It’s always been extra tricky because of the shared custody and the necessary back-and-forth between our household and the kids’ mother’s. Many times one parent will pay for something up front, and the other parent will reimburse afterward for half the cost. In theory, all such expenses are supposed to be explicitly agreed upon in advance; in practice, optional expenses — camp, a trip, lessons, etc. — are often implemented without prior discussion. Even necessary expenses can be wildly different in scope depending upon the thrift of the spender.

Having hundreds of dollars of unexpected charges turn up periodically wasn’t working for either Jak or me, but we tended to handle the situation differently. Jak typically advocated for reimbursing money we didn’t agree to (and would not otherwise have spent) in order to avoid an argument with his ex; I preferred to stand our ground and refuse the outlay. Add to that the aforementioned tendency for divorced dads to give their kids All The Things, my increasing frugality, and our reduced income, and you have a never-ending string of disagreements.

All of that stopped cold the moment we implemented the new budget. Giving Jak both full responsibility and complete control — within agreed-upon limits — derailed that whole dynamic. So far he’s not saving back any of the kids’ money, but he is staying within the budgets we agreed to, which means an overall spending reduction. Plus, now that every kid expense has a clear cost — either it means there’s something else in the future they can’t have or do, or it comes out of Jak’s own budget — he is more inclined to hold the line against the pressure (internal or external) to spend more than we can afford.

But that’s coming entirely from him, not me; he no longer feels like I’m the reason he’s having to push back, because I’m not even involved. In fact, I don’t have to worry about it at all, which is a huge relief.

Not that I broke the worry habit instantly; I still sometimes have to stop and remind myself that it’s not my problem. But then I enjoy the fact that I can just let go and not evaluate each expenditure. And I cannot overstate how happy I am that we never need to have that particular argument EVER AGAIN.

So you can see why I’ve come to call it the Conflict-Free Family Budget. For us, I’d say it’s been an unequivocal success. In the final installment, I’ll discuss adapting the system to your own situation.

Here’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 it’s been the other way around, but either way we’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
• Groceries
• Electricity
• Water/Sewer/Garbage
• Natural Gas
• Internet
• Phone
• Health Insurance
• Prescriptions
• Dentist
• Veterinary
• Car Insurance
• Gas
• Car Maintenance

Some of those categories are straightforward, but a few could use further explanation. For example, ‘Phone’ 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 ‘dumb’ LG phone that we already own.)

For some people, ‘Internet’ would be properly a luxury, but since neither Jak nor I can do any work — salaried or freelance — without it, for us it’s a need. ‘Groceries’, 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 we’re overusing the car, that’s what we’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, we’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 family’s Wants. The next step was to distribute that discretionary money into ‘accounts’ for each family member. We started with the children.

Jak’s elder daughter graduated last year and moved out over the summer, so we’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 Claire’s discretionary budget; Jak worried that wasn’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 kids’ Wants — in this case $500 — Jak and I split. (The precise amount adjusts up or down as income or Needs expenses change, but it’s remained pretty close to that number.) That $250 is ours to spend however we want, no questions asked, no unsolicited opinions expressed.

It’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 ‘If we suddenly dropped to zero income, would we need to buy this thing anyway?’ We aren’t just talking restaurant meals and entertainment, but also such things as:

• clothing
• beauty products
• sports equipment & fees
• alcohol
• gifts
• charity donations
• cell phones
• electronics
• small appliances
• kitchen equipment
• housewares
• furniture

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 didn’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; there’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 wouldn’t say I love it, I don’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 I’m the best person for the job in more ways than one. This doesn’t mean that Jak can’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 kids’ 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 ‘less’ and Jak on the side of ‘more’. (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 children’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 kid’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:

1. Calculate one after-tax income
2. Subtract bare-bones Needs
3. Subtract priority Savings
4. Apportion a reasonable amount to cover Wants for each child
5. Divide the remainder by the number of adults
6. 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, I’ll describe how it’s worked out for us over the last six months.