You can implement a simple financial system that will forever change the way you spend money. If you’re willing to devote an hour to this project, your spending will go from a source of anxiety to the financial equivalent of checking the weather report.
Right now, you might be in the very common situation of paying your bills, spending what you need to in order to live, and then spending on what you want — while hoping there is some money left at the end of the month.
Where to Start
First and foremost, you must be willing to do a spending analysis.The best approach is to print out the last two to three months of bank and credit card statements, sit down with a highlighter, and break out your spending into as many categories as possible. Examples include: Groceries, Eating Out, Alcohol, Coffee, Hair, Nails, Shopping, Charity, etc. Then, average out the two to three months and compare the expenses against the income you brought home.
If you find out that you’re spending more than you’re making, refer to these guidelines to get your spending back in line. But if you’re spending seems reasonable and you’re still able to meet your savings goals, then this is what you do: Open up a second checking account (one without maintenance fees, minimums, etc.) and use it solely for your discretionary spending.
It’s Called a “Play Account”
Here’s how to determine how much money to put into it. Add up all of the categories in your spending analysis that would be considered discretionary. Start with the ones listed above and also include things like Streaming Services, Online Shopping, Gifts, etc. Once you have your monthly budget, set up automatic contributions or transfers to this account. I recommend splitting the contributions up to match your pay periods or have them come twice per month. Remember that if you’re paid every two weeks, then there are actually 26 pay periods in the year so be sure to check your math.
If you followed the steps above, then you have full permission to spend all of that allotted money each month. But the catch is that you have to take care of all of your discretionary expenses from that account. No cheating. No pulling money from savings. No spending on the credit card. If you run out before the next contribution, then you’d better settle in on the couch with some ramen and reruns. Learn to pace your spending based on what you need at certain points in time (gifts, haircuts, clothing, etc.) and budget according.
The money coming out of your main checking account should be for absolute necessities: Rent or Mortgage, Utilities, Transportation, Tuition, Prescriptions, etc.
Essentially, what you have now accomplished is a sophisticated, electronic, automatic envelope system. Instead of having to nickel and dime yourself, or track your expenses fanatically, you can simply log in to your play account on a frequent basis to check your balance and you should be set.
Take a look at the following example: Let’s say you want to go shopping. You log in to your play account and see a balance of, say, $100. You know that your next contribution is set to arrive maybe five days later, so based on the balance and what you know is approaching in those five days socially, you can make an informed decision as to whether or not you can go shopping.
How It Works if You Are Married
Now, some of you might wonder how this works if you are married and your money is combined. This system is actually ideal for solving a lot of the issues around money in a marriage. Typically, I recommend the grocery money stays in the main joint checking account and that you each have a play account. These separate accounts would include the money for things such as your eating on your own (i.e., breakfasts, lunches) and socializing on your own (i.e., happy hour with the office). Date night money can remain in the joint account. However, it is important to keep in mind that most couples don’t need the same amount in each of their play accounts. It’s important to break out what you each need individually.
What About the Kids?
If children come into the equation, follow the same outline and add up the monthly spending for the kids’ activities, clothing, toys, etc. Whoever is doing the purchasing for the kids gets this amount added to their play account. Sometimes it’s divided between the parents if they are routinely doing different spending for the kids, or, sometimes it goes to one parent primarily responsible for the children.
Stick With It
Separating out the discretionary money allows you to be more intentional with your spending. If you do this, and stick with it, you’ll alleviate most of the financial anxiety in your life. The first month might feel a little crazy, like you have turned everything upside down, but the second month is easier. By the third month, you will expect contributions and know what to spend from where. After four months your spending patterns will have, or should have, changed for the better. Instead of being anxious when checking your online balance, it should feel like the the financial equivalent of checking the weather.
Advisory services offered through Investment Advisors, a division of ProEquities Inc., A Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member FINRA & SIPC. Stable Waters Financial is independent of ProEquities, Inc.
Katie Waters is a member of the DailyWorth Connect program. Read more about the program here.