How to Budget: Set Up a Fixed and Variable Checking Account

Set up a bank account for your fixed expenses and variable expenses. I actually learned this approach from one of my students shortly after I began teaching classes on money management for couples.  This is an approach that my husband and I use and it has been incredibly effective for us.

Set up two checking accounts at your bank:  one for your fixed monthly expenses for things like your mortgage, health insurance, phone bill, car insurance, debt payments that your paying on (car loans, student loans), utilities and your savings.  Set up the other checking account for your variable expenses: things like groceries, gasoline, dining out, recreation, clothing, medical expenses, household purchases and miscellaneous.

Refer to your spending plan to calculate how much money needs to go into your bank accounts each month.  Make it a priority to put money into your fixed checking account first and your variable checking account second.  By having two separate accounts for your fixed and variable expenses you’ll never spend money that was intended for a necessary living expense like your mortgage on a fun unnecessary expense like dining out.  This system also works well for self-employed professionals–all you do is transfer money into the appropriate fixed or variable bank account as it comes in. 

How to Budget: Create a Spending Plan

Create a spending plan instead of a budget! A budget is static and stays the same each month. A spending plan provides you with flexibility and allows you to determine how you want to spend your money each month based on your needs and activities for that particular month.

Create a spending plan based on your spending history. Look at your spending for the previous month or the past couple of months by going through your bank statements, check registers and credit card statements. Divide your spending into these four broad categories: 1) fixed expenses, 2) variable expenses, 3) debt payments (don’t include your mortgage in debt payments–instead record it under your fixed expenses. You will, however, want to record your car loan under debt payments) and 4) savings. You might not have any money going towards savings right now, but you’ll still want to retain this category to serve as a reminder of your savings goals.

Create a spending plan based on your spending history, using your four broad categories. Itemize your individual expenses below each broad category. For example, under the category of fixed expenses you’ll list: mortgage, health insurance, phone bill, car insurance, utilities, etc. Record all your expenses on the left side of a piece of paper and on the right side list your income, your partner’s income and any income from other sources, and then get a total for all your income sources.

Make sure you work your numbers until your expenses equal your income so that your income minus your expenses equals zero. If you end up with an extra $200 after you’ve subtracted your expenses from your income, don’t just leave it as an extra $200. Assign the $200 to a spending category like savings. In order for your spending plan to really work you’ll need to refer to it once a week or at the very least, twice a month. Mark out any expenses that have been paid and calculate how much money you have remaining to make sure you have enough money to make it through to the end of the month. Your spending plan should have coffee stains on it and be well worn by the end of each month!