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Saturday, April 29, 2017

Matching expenses to income

Posted by Robert on November 11, 2013

This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.

My wife recently began a new job, and she decided to buy a new car to go with it. The finance rate was cheaper than our mortgage rate, so we decided to finance the car. Consequently, we needed to decide when we want to make the monthly payments. The decision really doesn’t matter, financially, because it doesn’t change the cost of the car.

I suggested that we use the idea of matching to decide. My first suggestion was that we match the car payments  to her paycheque. She is paid bi-weekly (26 times per year), so it would make sense to have the car payment come out of the bank account the day after each paycheque. In the end, we decided to make the payment once a month, around the same time as our mortgage payment and credit card payment come out of our bank account.

When I worked as a financial planner, I heard from clients how awkward it can be to have all payments come out of the bank account at once, when payments into the bank account are made twice a month. The experience they had was of having “lots of money” in their bank account for half the month, then very little in the account during the other half. It made them feel alternately rich and poor. So what I would suggest was to better match the expenses with the income. As much as we were able, we would have half the expenses come out after the first paycheque, and the other half come out after the second paycheque.

Now that I don’t work, I have made a habit of looking at our bank account once a month and transferring in cash from our investment account if needed. Since all the expenses come out at once, I only have to ensure there is adequate cash in the account once a month.

Another way that some people match expenses with income is to set up a savings account. From a financial perspective, there’s no benefit to having separate accounts or mixing all the funds in a single account. But when saving for a large expense, such as a car or a vacation, it makes sense to save the money in a separate account, so that it can all be paid from that account later. That way, there is less temptation to spend the money on impulse items in the meantime.

Do you match your expenses to your income, either by timing or by account? Do you have another way to organize your budget?

Comments

3 Responses to “Matching expenses to income”
  1. deegee says:

    Back in my early working days, I got paid every 2 weeks but had the bulk of my expenses all due at around the same time, at the start of the month. This made for a mismatch between the two, requiring me to make sure the biweekly paycheck in the middle of the month could help cover the larger expenses at the end/start of the next month. And because it was a biweekly paycheck, it moved up a few days from month to month, enabling me to have a “3-paycheck month” once in a while.

    Once I paid off the mortgage, then one biweekly paycheck covered all the end-of-month expenses which was nice. But when I switched to working part-time, I went back to the previous cash flow, with my reduced end-of-month expenses sometimes exceeding my reduced biweekly paycheck.

    Now retired, I have only one “paycheck” which is my monthly bond fund dividend payment which covers my low expenses most months. But I have to plan ahead for the larger, irregular expenses, having to build up surpluses 2 or 3 months ahead to cover them. What used to be a back-of-an-envelope calculation I now have to use a spreadsheet but that’s fine with me.

  2. Brandy says:

    I get paid semi-monthly and I split my bills so that way about half our paid out of each paycheck. Some bills get paid way early so I can do this.

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