Our spending plan

Our automated spending plan.

Over the last few years we have tried a number of budgeting techniques with the hope of getting a better handle on our finances. We got to a good place and tightened loose ends after reading Ramit Sethi’s book, I Will Teach You To Be Rich. We created an automated spending plan spreadsheet which breaks down our budget into 5 categories: income, fixed costs (i.e. living expenses), investments, savings, and guilt-free spending. If you’ve read Ramit’s book or listened to his podcast, this is our version of the Conscious Spending Plan.

Spending plan categories

Income

We currently have our pay and the Canada Child Benefit as regular income. Any other sources of “income” is handled via our “unexpected income” money rule.

Fixed costs

All our typical living expenses: mortgage, property taxes, insurance, groceries, transportation, and such. It also includes the often forgotten expenses that may not come around as often: credit card annual fees, yearly subscriptions, and so on. To close off the category, we have a buffer line item which covers any forgotten, unexpected, or higher than planned expenses, e.g. a utility raising its prices.

Investments

Contributions in our registered and non-registered accounts. This also includes contributions to an RESP to help with our children’s education.

Savings

We have 5 savings accounts: Emergency fund, Experience fund, Car fund, Buffer fund, and a Gift fund.

Emergency fund

This is our primary account. It seems strange, but more on this later. It has 6 months of living expenses.

Experience fund

This account is used to create memories. It can be used for anything and everything experience related. We budget for a minimum of one bigger [out-of-country] trip per year, as well as a number of local staycations.

Car fund

We are driving a paid-off 2014 car and we intend to drive it until it becomes unsafe. While we don’t have payments, we make one in a savings account with the goal of purchasing our next car in cash. We use a high interest savings account rather than an investment account as the timeline is likely to be less than five years. We are watching GIC rates and would consider locking into a short term (one year or less) if the rate makes sense.

Buffer fund

This acts as a bit of a pre-Emergency fund fund. Unlike our Emergency fund which we only intend to touch should an emergency occur, e.g. loss of income, our Buffer fund is for things we know will come up but are hard to plan for. This could be additional gifts, an unexpected minor or major repair or even increased premiums on utilities. This is the account the buffer line item in our fixed costs category is transferred into.

Gift fund

All about giving. Money in this account is all earmarked to be given away. It includes family gifts: birthday presents, parties, holidays as well as planned and unplanned donations.

Guilt-free spending

This money can be spent on anything we want. No more feeling guilty for grabbing dinner at the restaurant or buying a morning latte. Justifying a purchase comes down to “is there money left in the account? And do we really want it?”.

Setting up the plan

When we started listing out the items in each category we quickly noticed that different items have different frequencies. Our mortgage is bi-weekly, our pay is semi-monthly, some utilities are monthly, some are bi-monthly, some subscriptions are yearly, some monthly.

To make it easier, we opted to translate everything on a monthly frequency. This means every item on our spending plan is calculated based on its monthly amount. Our bi-weekly mortgage for example was calculated by multiplying our payment by the number of occurrences in a year (26) and dividing by 12. Our income was calculated by multiplying our pay by 2 (paid twice monthly).

• A $1,000 bi-weekly mortgage is $2,166.67 monthly. ($1,000 * 26 / 12)¹
• A $2,000 semi-monthly pay is $4,000 monthly. ($2,000 * 2)¹

We repeated this exercise with every amount that wasn’t monthly-based to fill out our spending plan.

Take the plan and automate it

We have a joint chequing account and credit cards with a different institution which is where we transfer our guilt-free money. Both credit cards are paid via automated withdrawal from the joint chequing account. Our credit cards are exclusively² used for guilt-free spending which means the only numbers we have to keep an eye on are the credit card balance against the joint chequing balance. As long as the joint chequing’s balance is greater than the credit card balance, we’re within our guilt-free spending.

As mentioned early, although a bit strange we opted for our Emergency fund to be our primary account. This account is with EQ Bank which has no monthly fees or minimum balance, free bill payments, free e-Transfers, high interest, and more. Our pay is deposited into this account. Our investments, savings, guilt-free spending, and bills are auto-withdrawn or transferred from this account.

We opted to keep our automations to be monthly which means every transfer occurs once a month. We opted for the 3rd of every month but that is completely arbitrary. The transfers are the previous month’s income meaning we are technically one month ahead. This gives us room to play defence should something go unexpectedly.

When we filled out our spending plan, we knew exactly how much money needed to go where. The money for fixed expenses stays in the Emergency fund and are auto-withdrawn by the service providers. The investments are auto transferred into our brokerage accounts, our savings are auto transferred to our other savings accounts, and our guilt-free money is auto transferred to our joint chequing. This looks something like:

      Income
        ++
|----------------|
| Emergency fund | -- Bills
|----------------|
   |
  3rd
monthly
   |
   |    |-------------|
   | ++ | Investments |
   |    |-------------|
   |
   |    |-------------|
   | ++ | Savings     |
   |    |-------------|
   |
   |    |-------------|
   | ++ | Guilt-free  | -- Credit cards
        |-------------|


++ : Automated transfer or deposit
-- : Pre-authorized debits

Using our Emergency fund as our primary account gives us peace of mind by ensuring there will be money in the account and we will never receive non-sufficient funds (NSF) fees. With everything planned and automated we also feel confident we will not use funds dedicated for emergencies unexpectedly.

While I still look at our accounts regularly, the span between those glances keeps getting longer with every passing month as the system keeps running without issues. The goal is to eventually look only on the first of the month to confirm everything ran as expected. We have a target of revisiting and adjusting the amounts every January unless something drastic changes during the year.

Confirming everything works

On the first of every month, we do a quick check to confirm the system is still working as expected. Our spreadsheet answers the following question: Did all our accounts change by their expected amount?

If yes, no adjustments are needed. Otherwise, we can detect the discrepancy. Typically one of two things happened:

• A utility increased its price
• An unexpected expense occurred

If a utility increased we can determine whether the change requires an adjustment in our spending plan immediately, a one-time transfer from the Buffer fund, or no action at all. If an unexpected expense occurred, we transfer from the Buffer fund and take note for January as to whether the item will require its own line item the following year.

Spreadsheet overview

In the following example, we would notice looking at our overview spreadsheet that the buffer fund account increased by $28.02 more than expected.

We would then look at the transactions in the buffer fund account and notice an unbudged refund occured for that exact amount.

We are 6 months in this new plan and we’ve never felt so in control of our finances. Our finances are now… boring and that’s so refreshing!

Happy saving!

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