Thursday, November 22, 2007

The balancing act

Meg at The World of Wealth posted this week about why she uses two chequing accounts. Basically, she uses one to cover her committed expenses (including savings, donations and bills) through automatic payments, and the other for her discretionary spending. The idea is that she can spend as much of the discretionary money as she wants, because all of her savings and monthly bills have already come out of her primary account.

I manage my cash flow in a way similar to Meg's system. Ms. Loonie and I have a joint chequing account, and my paycheque goes into this account every two weeks. All our monthly bills come out of this account, and I transfer my leftover funds into my secondary account. Having my discretionary income sequestered in its own account like this means that I know at a glance how much cash I have left before my next pay, and it was a nice affirmation to read that someone else uses a setup so similar to my own.

In another post, Meg goes into how her budget actually works, including the details on what percentage of her income she allocates to each category (savings, donations, bills, and fun). This was where I started to see just how much room for improvement I still have. Meg targets a split of her gross income into 20% savings, 10% donations, 60% bills (including taxes), and 10% fun. When I look at my own allocation, I'm currently sitting at 9.4% savings, 1.4% donations, 78.4% bills, and 10.8% fun. A few things stand out here:
  • Debt reduction (revolving debt and student loans) accounts for 12.9% of my gross income. Once I've paid off my debts, a big chunk of my "bills" allocation will be moved into other categories.

  • My charitable giving is anemic at best. This is where I'm the most off the mark, giving less than one fifth of the generally recommended 10% tithe. When my debts are gone, this is the first area I'll look to increase.

  • The definition of the categories is somewhat subjective. For example, I think housing and groceries should go into the "bills" category, since they're really basic living expenses. Vehicle maintenance/insurance/licensing costs probably belong here as well, although they're not strictly essential. I include cable/internet/phone in this category, because they are committed expenses, even if they are really luxuries. The way I look at it is that they're living expenses, but if need be, they can be pruned.

  • Although I like Meg's target allocation, it's not gospel. I need to determine an allocation that matches with our own values and goals.
The message here is really that there are two requirements for a truly balanced budget:
  1. The budgeted total across all spending categories is less than or equal to your total income

  2. The budget allocates spending to categories in a way that matches your values and goals
My budget meets the first requirement, but I have a way to go before I really line up my budget with my goals.

1 comment:

MEG said...

Great post! I too like the affirmation that someone else uses a version of my system. It seems so obvious and more efficient now that I'm using multiple accounts, but really it isn't something that necessarily occurs to a person naturally. I went months and months struggling to balance my budget within my one checking account before my Aha! moment of just opening a separate account for my spending money. Thanks for sharing!