Six Keys to Responsible Spending

Last month in A Plan for Making Your First Million, we talked about the importance of agreeing on a spending plan and following it faithfully.

For several years during the late 1980s, my wife Susie and I applied a rather rigorous approach to control our spending, and it worked pretty well. I didn't keep a diary at the time, but looking back on it now, these are the "keys to success" that come to mind.

1. Be truthful in your communications. I keep track of the money in our family, and I was the first to realize we were facing a serious financial challenge (see chapter 30 of The Sound Mind Investing Handbook for details). Susie knew that we were experiencing some financial disappointments, but didn't know how difficult it had become to balance our income and outgo. Even though some of the events that had caused the problem were beyond my control, I felt like a failure in my role as the financial provider in the family. I hated the idea of telling her our situation, but knew it would take both our best efforts to deal with it responsibly.

2. Be thorough in your preparations. As I began working on our spending plan, I listed not only every category of spending I could think of, but also every anticipated item within each category. For example, I didn't just put down $500 for family birthdays—I listed each person on the gift list and how much we typically spent on that person. The more categories you have, the better idea you'll have of where all the money's going and, consequently, the more ideas you'll get on where you can save. Furthermore, I didn't just put down round numbers that "seemed right." I used my cancelled checks, Visa bills, and old tax returns to see what I'd actually spent in the past.

3. Be willing to change your lifestyle. All of my work only gave us a picture of where our money had gone in the past. Then it was time to go over the spending categories and discuss what we could do to lower (or temporarily eliminate) the spending in each one. Savings are possible in almost every category if you're willing to make changes in your lifestyle and shopping habits. The trendiness of frugal living has given rise to several helpful newsletters on how to live well on less money. You can learn more about two that I've found to be worthwhile at Debt Proof Living and Good Advice Press.

4. Be consistent in monitoring your spending. My goal was to account for 100% of our spending (an almost impossible task, as I was to find out!). It's amazing how much money is spent a few dollars here and a few dollars there. This was more of a burden on Susie than on me because the wife typically handles the majority of the routine spending. We used "old reliable"—the envelope system—to help us stay within our budget. Here's how we did it.

   Each week, I would write a check to Susie for the amount of her spending. She would cash it and carry the money in her purse in a small envelope that was just slightly larger than a dollar bill. If she went to Kroger and spent $48.24, she'd write "Groceries $48.24" on the front of the envelope at the time she withdrew the money. Ditto the drug store, gas, school lunch money . . . whatever. There were two advantages to doing it this way. First, it was easier to keep track of her spending because she was pulling the cash from the actual envelope. Second, she could pace herself as the week went along and she saw her cash begin to dwindle. At the end of the week, she'd give me the old envelope so I could track her spending in a worksheet. Any unspent money was transferred to a new envelope and the process would start over.

   An area of confusion for many couples is how to handle the spending that occurs periodically rather than weekly. The way that worked best for us was to divide those items into two groups. I took responsibility for the expenses that were somewhat automatic with respect to the amount and date due—for example, monthly mortgage, life insurance premiums, utilities, and tuition payments. These were typically paid by check. Susie took those categories where purchasing decisions were involved—birthdays, clothing, household items and repairs—and we set aside an amount in an envelope for each one. These were handled like the weekly envelope system except she didn't need to carry them with her.

5. Be disciplined in staying within your agreed upon limits. The reason you need to closely monitor your spending is so you will know if you're on target or whether mid-course adjustments are needed. This gives you a certain degree of flexibility. If you go over in one area, you can cut back in another. For example, an unexpected dental bill of $200 may have to come out of your "recreation" envelope if the "medical" envelope is already empty. Or, you might prefer to take $20 out of ten different envelopes to spread the shortfall around and lessen the impact on any one category.

6. Be mutually supportive. Susie was great! She wasn't critical or complaining in any way. In fact, she continually reminded me that God was our source of supply, and we would just need to do the best we could while waiting on Him to send a solution. Her positive attitude was a tremendous encouragement to me as we "tightened our belt." It was key to have her cooperation. If you and your spouse aren't of one mind as to the importance of developing and living out this kind of lifestyle, conflicts will arise frequently.

Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective.