Credit cards are an important part of me and my wife’s budgeting process. We needed a way to budget individually and as a family. The problem was using one card or a joint credit card account. It was difficult to keep track of who was spending what and the feeling of guilt every time either of us wanted to purchase something for ourselves.
Our solution was to have three credit card accounts. One account that took care of all family expenses and two other accounts that were our personal cards.
While this solution has worked well, it can still be improved upon. I am going to discuss how we currently use our cards, problems with this process, and a new plan for individual budgeting.
Setting the Budget
When we decide on credit card budgets, we break the expenses down into the three categories of hers, mine, and ours. If I want to go out for drinks with friends, I put the bill on my card. If we are buying groceries, we use the family card. It’s not a perfect system, but it works really well.
There are times when she purchases kids clothes on her personal card and I’ll buy tools or take a trip to Home Depot for house repairs on my card, but for the most part, it evens out and we don’t have any issues.
The biggest benefit of the split budget process is that we are in control of our own spending. I don’t have to feel guilty if I want to grab coffee with friends since I am not wrecking our family card budget. And neither of us have to ask permission to spend the money included in our personal card budgets.
We evaluate our credit card budgets yearly. When we first started, it took a few months to determine what a good budget would be, but now we are pretty spot on. We can each pay for our fuel, hobbies, and meals at work with the money we have allotted.
The family card budget gets determined as a typical budget. We break down the expenses that we expect for each month and use that as the grand total. At the end of the month, we pay the three bills online and move on to the next month.
The Drawbacks of the Plan
This process has worked well for us overall. When combined, our two personal cards are almost always at or under budget. There are times when this has not been the case, but usually, this stems from us putting family purchases on our personal cards either out of ease because we didn’t have a family card with us, or mistakenly grabbing the wrong card when its time to pay.
The biggest drawback I have seen with this plan is the lack of focus on the family card. We are really good at managing our personal card balances, but the family card becomes a catch-all card for the “everything else” expenses. Because of that, it is easy to overlook that card and to let the balance build up until we get the bill at the end of the month.
To remedy this problem, we have decided to be more proactive with the family card. We both have the apps on our phone so that we can easily check the family card balance and we decided that once a week we would review the balance on the family card together so that we can prioritize trips to the grocery store or expenses over the next week.
With these changes, we will be able to wrangle in the family card and get a better idea of what the budget should look like.
Spend it or Lose it
The second drawback to this plan is that it uses a fixed budget approach. There are three main budget types, and this type has its advantages and disadvantages. The advantage is its ease. We have a set budget on our personal cards every month and that is ours to spend. The disadvantage is that the budget restarts every month, so if we do not spend our entire budget that money is “lost” to paying off loans or adding to savings. This increases the incentive to spend the entire budget every month because if we don’t spend it we lose it.
Perhaps a bigger issue is the lack of ability to save the money we do not spend. The current process makes it difficult to budget for bigger expenses like birthday presents that can wreck a normal monthly budget but would be a softer blow if we were able to save for such expenses. Right now the incentive is to spend the entire budget, but that would change if there was a way to roll over any excess balance to the next month. This is not as simple as the fixed budget model. The budget won’t change, the amount allotted each month would stay consistent, but we would track two earmarked personal balances within our checking account that would collect leftover credit card balances.
If I spend $60 less one month, then next month my personal credit card budget increases by $60 and this would continue. This is very similar to a Revenue Center Management or RCM model that universities use to manage college finances. Instead of finance decisions happening at the university level, individual colleges handle their own revenue and expenses and can keep the excess for further investment if the college itself is profitable.
This rollover model incentivizes not spending so that balance can build up in the personal account. We will still have one central checking account, but I’ll adjust our finances spreadsheet to create a nested personal account within our checking account. In addition, we will still maintain the current process for the family card.
The New Plan for the New Year
The plan we have been using has worked out well, but it can be better. These are going to be the main components of our family and personal budgets with changes in red:
- Use three accounts: one family and two personal credit cards
- Monthly budget is set for all three accounts
- Budget is evaluated yearly
- We review the family credit card once per week
- If the budgeted balance is not spent by the end of the month, then the remaining balance is kept in the checking account and earmarked for future personal spending.
- There is no limit to the amount of cash rolled over and no time limit. The hope is that if personal accounts get too high then they will be used according to the four-step savings plan unless the cash is being saved for a large personal account purchase.
With the changes for this year, I think the budgets will be easier to track and more importantly, by rolling over balances I imagine my wife and I will end up saving a lot in our personal savings which will end up being used for paying down so final student loans. The incentive to spend will be gone and since we are natural savers and less inclined to spend anyway, our financial situation will be all the better.
My hope is that this post stays a work in progress. Understanding the best way for a family to budget personal and family expenses is important and can be a touchy subject for some. While not perfect, I am looking forward to this plan. I will provide updates on problems and solutions and hope that you can take some morsel of useful information from our path to the perfect family credit card process.