Budgeting is a critical skill for managing finances, even more so for high-income couples who often deal with complex financial situations. In a recent webinar, I demonstrated several essential principles and practical tips to make budgeting both effective and efficient. Here’s a detailed overview of the key takeaways.
Finding the Sweet Spot: When it comes to budgeting, detail matters. Most people use a variety of categories, but the challenge is finding the right balance. If your budget has more than 10 categories, it can become cumbersome to assign and analyze expenses. Conversely, having too few categories might not provide the insights needed to make informed financial adjustments.
Optimal Number of Categories: We recommend using 5-10 high-level categories. Examples include:
- Housing
- Food
- Travel
- Health
- Cars
- Kids
- Shopping
Spending time setting up these categories thoughtfully will help you gain the necessary insights while keeping the process manageable.
Tracking Cash Withdrawals: One crucial aspect of budgeting as a couple is ensuring all expenses are accounted for. Cash withdrawals from ATMs can easily end up in a “miscellaneous” category unless they are regularly reviewed and appropriately categorized. The same goes for “Amazon” purchases. This step is vital to maintain an accurate and transparent budget.
Spending Less with Cash: Paying with cash can significantly influence spending behavior. Numerous studies have shown that consumers tend to spend less when using cash compared to credit cards. For instance:
- McKinsey Study: Consumers are more likely to make impulse purchases with credit cards. The ease and immediacy of swiping a card contribute to higher spending.
- MIT Experiment: People are willing to spend up to 100% more when using credit cards compared to cash, as demonstrated in a study involving sporting event tickets.
- Journal of Consumer Research: The psychological pain of paying with cash can curb spending, making individuals more mindful of their expenditures.
Planning for Non-Monthly Costs: A common challenge in budgeting is how to account for irregular, non-monthly expenses. Some budgeting software solutions, such as Monarch Money, offer features that allow you to roll over unused funds in a category each month. This functionality helps you accrue for irregular expenses over time, ensuring you’re prepared when they arise.
Automation and Regular Review: With the right tools, budgeting can be efficient and straightforward. Budgeting software that automates transaction categorization can save significant time. A quick weekly scan of transactions, combined with a thorough monthly review of income versus expenses, is usually sufficient.
Focusing on the Savings Rate: When reviewing monthly cash flows, the primary metric should be your savings rate. This rate provides a clear picture of how much you’re saving relative to your income. If you’ve done long-term financial planning, you should have a target savings rate that aligns with your financial goals. Monitoring this rate helps keep you on track toward achieving those goals.
Conclusion
Budgeting doesn’t have to be a daunting task, even for high-income couples with complex financial situations. By finding the right balance in budget categories, diligently tracking all expenses, planning for irregular costs, and utilizing automation, you can create an effective and manageable budgeting system. The ultimate goal is to achieve greater control over your finances by incorporating these strategies into your financial routine. At Artemis, I work with many high-income couples to develop sustainable budgets that enable them to live the life they want today while also ensuring financial stability and growth. Please reach out if you would like to learn more.
