How To Manage Discretionary Spending With Two Accounts
Have you ever heard of the “see food” diet? I like to joke that sometimes that’s my diet: I see food and I eat it! The best way for people like me to stick to a plan to eat more nutritiously is to just have the foods I want to eat more of in sight, while limiting the junk food, right?
Well, I also use the “see money” budget to manage my cash flow, and I think a lot of people do this as well, mostly unintentionally: I see money and I spend it. That’s why the only money I keep in my spending account is money that I can afford to spend on discretionary stuff like sushi, wine, cat toys and spa pedicures, while money that I need for things like veterinary expenses, car problems and groceries is separated out.
The same principle applies when it comes to sticking to any type of spending or savings plan — if you want to spend less money so that you have enough set aside to pay for things that come up, for people on the “see money” budget, the best way to do that is to get it out of your sight.
The reason that most budgeting and savings intentions fail is not because you suck at money. It's that too often we try to eyeball whether we can afford to splurge on stuff, which often happens right before pay day — we see that we actually have some wiggle room in our checking account and we know it’s about to be replenished, so we go ahead and spend it, only to find that we need that extra money when something else comes up after pay day and all the money is already allocated to other priorities.
One idea I had to combat this issue, which is often what leads to credit card debt that can easily get out of hand, is to fund two specific accounts each paycheck:
Account 1: The ‘Oh, sh*t!’ account
This account is for things like, “Oh sh*t! I just dropped my phone and I need a new screen” ($90) or, “Oh crap! I have a flat tire and I need a tow” ($100) or a common one in my house, “Oh NO! The cat has a mystery illness and needs all of the tests” ($800). In order to make sure you have enough money set aside to cover these things, take a look back at the last several months for all the things like this that made you say, “Oh sh*t!”
Then just set up an online savings account (you can find the ones that pay the highest interest with no fees at www.bankrate.com) and have the amount put directly in from your paycheck or set up an automatic transfer each month. For me, that’s $50 per pay or $100 per month, which seems to be the average cost of “oh sh*t!”
This account is for everyday life things that truly make you just say, “oh sh*t,” that you couldn’t have predicted, so if an "oh sh*t" moment turns out to be something you have to now spend ongoing (like the cat's mystery illness requires prescription food at $50 a bag), make sure you adjust your spending account plans as well.
Account 2: The ‘treat yourself’ account
Most people I talk to would say that dining out/ordering in is one of the areas that they tend to bleed money (I feel that in a way that literally gives me high blood pressure) and it’s one area they’d like to cut back so they go to extremes and swear if off cold turkey, but that never works.
It’s unrealistic to think that you’re going to skip going out or ordering in for several months just so that you can build up a savings account or save for retirement, so why not have an amount of money set aside so you can still be mindful, but not be overly anal about tracking.
This works great for days when you're like, “I really don’t feel like cooking tonight,” as you're pulling up Door Dash or when your bestie texts for emergency drinks to talk through a work issue - the goal is to give yourself grace and wiggle room, while also placing limits that are more painless than having to track each penny.
Maybe this account can be used for salon pedicures or a personal training session at the gym — whatever it is that you’d like to limit, but not totally give up in order to buckle down on other goals. We all need a treat every once in awhile, no matter how tight our budget. Having a separate account with, say, $25 going in each paycheck, allows you to do that without going overboard.
What these accounts aren’t for
Note that these accounts are different from your emergency fund, which is there to pay your bills in case your income goes away — actual emergencies, which does not include a last-minute shower gift that you forgot about til the day of the shower. These accounts are also not there to pay for things that you can plan ahead for, such as holidays, vacation travel or ongoing care like hair cuts and childcare. I get into that strategy in this post.
Finding what works for you
The thing about cash management is that there are lots of different ways to do it, some more involved than others. If you’ve tried other methods and still struggle to plan adequately for your life spending, try this method.
For me, figuring out this part about money is just as much about hacking yourself and your habits as it is about willpower and control. Keep tweaking it til you’ve found a way that works, allowing you to more effortlessly work toward other goals.