Discretionary Accounts

[Slug]

My family finance system is set up in a way where my wife and I pay our household expenses from a single account and then have separate discretionary accounts for our individual whims. For those with similar methods I have the following questions:

1. What constitutes a discretionary event? Going out to lunch at McDonald's? Buying a Wii? Buying work clothes? Buying soccer cleats? Investing in a loan on Prosper.com? Buying a flat screen everyone will enjoy but only I need.
   
   
   
2. What about if I need a new (to me) car and I want it to be BMW 5 series and she wants me to get a Prius? Does the price difference come from my discretionary account? That doesn't seem equitable.
   
   
   
3. How often do you fund your account and how much do you put in at that interval?
   
   
   
4. What % of net income do you allocate to discretionary spending?
   
   
   
5. At what price point should a spouse consult another spouse on a purchase? Or, is there other important criteria like 'who's going to take care of the gerbil?'
   

Just some questions I'm struggling with. Thanks for your thoughts.

[disneysteve]

Why do you keep separate accounts? I think knowing the reason for doing so might help answer some of your questions.

[Slug]

I think it's kind of like the 'envelope' method. For many I think it limits potential for personal excess spending. However, this is not the issue for either of us. We actually have the opposite problem (over-saving and not doing fun things that cost money). So, we have this discretionary money sitting there and say hey let's do something fun or hey, I really want a pair of those insulated Crocs. If we don't have those accounts, we kind of forget to do include fun. Instead, we save for new energy efficient windows (not fun). We achieve the non-fun goal faster, but I think the marriage as a whole actually suffers.

Originally, we constructed this system when we had similar salaries and each of us contributed a set amt. into the monthly joint fund and kept the difference for our whims. This was pretty ideal. However, now I outearn her at a ~10:1 ratio so it's no longer feasible...or I'm getting that 5 series BMW in no time :-)

[Broken Arrow]

What constitutes a discretionary event? Going out to lunch at McDonald's? Buying a Wii? Buying work clothes? Buying soccer cleats? Investing in a loan on Prosper.com? Buying a flat screen everyone will enjoy but only I need.

To me, it's anything that's not budgeted for basic necessities. So, yes, all of the above would be considered as discretionary to me.

What about if I need a new (to me) car and I want it to be BMW 5 series and she wants me to get a Prius? Does the price difference come from my discretionary account? That doesn't seem equitable.

Right, it doesn't... but if you do want to be perfectly equal, you would have a car fund (or two) where money meant for the cars are contributed equally. When the fund has enough, you buy the car you want. Naturally, more expensive cars will take longer to save up than cheaper ones....

And again, we're talking about discretionary spending for a luxury item here... that, granted, may double as a basic necessity, but is a luxury nonetheless.

The rest, I really can't comment. I'm currently single, and I didn't have any financial sense when I was married. However, I suspect much of the answer will lie in whatever you and your spouse agrees on?

[Broken Arrow]

Originally, we constructed this system when we had similar salaries and each of us contributed a set amt. into the monthly joint fund and kept the difference for our whims. This was pretty ideal. However, now I outearn her at a ~10:1 ratio so it's no longer feasible...or I'm getting that 5 series BMW in no time :-)

I see! So the two of you are working with a collaborative, separate finance model, which works when both sides are fairly even. However, now it's lopsided so it's not....

I agree with Steve (even though I do advocate certain levels of separate financing) in that I think couples should treat it more as a unified pool of money. Based on that pool, you first budget away the basic necessities, which includes future investing and so forth. Then, the leftovers are split 50/50, as discretionary money.

Yeah... I know. Basically, this is going to put you on the spot, because you'll end up paying more. BUT... it's the right thing to do. Your wife will be happier, which means you'll be happier. Who knows, maybe she'll even accommodate you more if you know what I mean.

At least, that's my personal opinion.

[disneysteve]

you first budget away the basic necessities

Where it gets tricky is determining those necessities. A car is a necessity, but how much is appropriate for that to count as a necessity. A Prius or BMW certainly are luxury items, well beyond what is needed for basic transportation needs. I guess you'd need to agree on a base price for a car and that anything beyond that amount would come from discretionary spending.

Too confusing for me. I'll stick with keeping everything joint. It is much simpler.

[TermMonster]

I would suggest you determine annually (with your wife) a discretionary fund goal. I think it best to fund the goal quarterly (4 times) during the year. Ideally, this would be one "corporate / joint" account which will reinforce your dual commitment to the goal. I've found that animosity can creep into the relationship when one party feels they are "disproportionately" contributing to a goal that benefits both equally. A joint account can help ameliorate this in a relationship.

The question of "how much should I commit to a discretionary account" should presume that you've maxed out your retirement savings options, have 6 months of operating cash in an emergency account, and have zero credit card and auto debt. Technically, what's left should be divided equally between reducing home mortgage and education debt and your discretionary account.

You are saving a lot and in a great position to secure your lifestyle and have a lot of fun! Congratulations.

[sandrark]

My family finance system is set up in a way where my wife and I pay our household expenses from a single account and then have separate discretionary accounts for our individual whims.

We do this too. Based on 7 years of living together before we married and established joint accounts, we had a pretty good idea of the cost of things.

For those with similar methods I have the following questions:

What constitutes a discretionary event? Going out to lunch at McDonald's? Buying a Wii? Buying work clothes? Buying soccer cleats? Investing in a loan on Prosper.com? Buying a flat screen everyone will enjoy but only I need.

Yes, yes, yes, yes, yes, and yes.

Basically, it's easier to set up what's NOT a discretionary expense. For us, it's groceries, eating out (together), entertainment (together), house bills (utilities, taxes, mortgage, insurance), Xmas gifts to family members, vet bills for the pets, car insurance, and vacations. I also save 19% of my gross income in retirement accounts, and have requested/made clear/demanded that DH fund a SEP-IRA to the max each year. This reduces my angst should he spend more than I do - the basics are taken care of.

If I get a spa day? Personal. He decides to fly two weekends a month? Personal. I buy books? Personal. He buys a digital SLR camera? Personal.

[*]What about if I need a new (to me) car and I want it to be BMW 5 series and she wants me to get a Prius? Does the price difference come from my discretionary account? That doesn't seem equitable.

Then make it proportional. If you make 90% of the income, then you fund 90% of the joint purchases. She funds 10%. Then if you can still afford a BMW, go for it.

We (DH and I) recently had similar discussions. I was instructed by my doctor, post-spine surgery, to get a squishier car. I chose an expensive one. Because I'm a saver, I was able to put down 75% of the cost. The remaining 25% I financed at 3.9%, for three years, with a payment about the same as I had when I purchased a Saturn in 1993.

That car payment comes from my discretionary income, as does the car insurance. The net effect for DH is he gets to ride in a really nice car, but he doesn't have to pay for it.

[*]How often do you fund your account and how much do you put in at that interval?

We deposit to the account on a monthly basis. Once in awhile, we need additional funds, or we get a check (tax refund, business interest payout) which gets deposited into the joint accounts as well. If we have a short month, we have plenty in savings to transfer some $$ over, and cover it.

[*]What % of net income do you allocate to discretionary spending?

Well, do I count savings? Because I'm a savings freak, so that's where a lot of my "discretionary" income goes. DH is not - and he makes less. So his $$ goes to retirement savings at a minimal monthly amount, a large annual deposit once the SEP-IRA limit is figured out at tax-time, and flying (his passion).

I am a fan of the Elizabeth Warren "All Your Worth" balanced money formula. She advocated 50% for needs, 30% for wants, 10% for savings, and 10% for retirement. I don't think that's enough for retirement, so my proportions are:

50% Must Have/Committed
20% to retirement
10% to liquid, long term savings (car replacement, house repair, etc).
20% to wants

[*]At what price point should a spouse consult another spouse on a purchase? Or, is there other important criteria like 'who's going to take care of the gerbil?'

We talk about everything. Admittedly, if I wanted to buy a DVD, I wouldn't consult DH. But if I were buying a flat screen TV? Yes. Electronic equipment of any kind - yes.

He talked with me about his digital camera purchase, as I did mine, even though they came from our personal savings.

Sounds to me like you really need to stop feeling like your $$ is YOURS, when you make 10X what your DW does. That's one reason I like the proportional methodology - it's fair based on education, income, and it's ADJUSTABLE. So it takes care of changing incomes based on layoffs, childbearing, illness, disability, promotions, etc. I think lots of couples negotiate this once, and then never adjust the amounts or percentages when changes occur.

Good luck! And I hope this was helpful.

Sandi

Just some questions I'm struggling with. Thanks for your thoughts.

[disneysteve]

I was instructed by my doctor, post-spine surgery, to get a squishier car.

I'm curious. What exactly constitutes a "squishier" car?

[Caoineag]

We are everything joint now but we started out with separate pots of money. When we did that we alloted bills based on who had room in the budget. Such as, rent was split but he bought groceries and I paid for the utilities, and so on. When he made more money, he picked up the majority of the bills, when I had more money, I paid the majority of the bills. We did this as just a method of dividing out the work. Eventually I discovered hubby wasn't so hot at personal finance so now I do everything and so we just have a joint pot of money.

We would decide on big (and most little) purchases together even when our pots of money were kept separate so I am not sure that we reflect the typical separate finances couple. Basically we had to do a lot of talking about budget priorities when everything was separate, we actually do less of that since I have taken over all the finances since I actually have a real budget now and everything is typically on autopilot.

[TermMonster]

1987 Cadillac Deville.... = "squishy car"

[graceful]

Hahaha...

I take care of most of the bills. We have a joint account that DH's pay gets direct deposited into. I have a separate personal account that we deposit my pay into. And a bunch of other accounts that are either joint or individual that we "park" money in depending on the interest rates.

Even though, his name isn't on my account (had it for over 20 years before marriage), I'd still consider it joint money.

Monthly bills such as "rent" and now mortgage, tithing, utilities, etc. get paid through our joint account. Varying amounts of "discretionary" spending charge on credit cards, no matter who charges it, are usually paid from my account. My account is at the same bank that some of our credit cards are at and all the bank and credit balances are listed on the same page on-line so when I check a credit balance, I find it easier just paying it from my account immediately while there. My life insurance premiums are paid from my account, DH's from joint.

Sometimes, when my bonus or commission gets deposited and I have a larger than usual balance, I'll pay the auto insurance or something similar that comes due at that time before I transfer the bulk of it to an on-line savings account.

"Major" purchases usually get discussed. Nothing expensive is "truly" discretionary in our marriage. Most of the time, we give the green light to each other to get whatever it is we want. The person bringing it up is usually the one that will change his/her mind because they don't think it is worth spending the money on it yet. Smaller items may or may not be discussed only because maybe the other person is too busy to talk or not "interested" in the item.

I will confirm all purchases showing up on our credit cards not to "hold" DH accountable for small discretionary purchases but to make sure that I am paying what we actually bought and paid for.

[LivingAlmostLarge]

evything is joint for us and we get a monthly allowance. I do most of the spending, but I run it by my DH. I pay all the bills, etc.

[sandrark]

I'm curious. What exactly constitutes a "squishier" car?

Considering that I was driving a truck with a ladder frame? D*mn near anything else on the market.

Think Buick, Cadillac, Lexus - their suspensions are tuned to be softer, less harsh, and with very little bouncing or jarring.

Sandi

[Slug]

Thanks to all who commented thus far, esp. sandrark. I did want to address a couple of thoughts that were put forth:

1. I'm focused on MY money - It's actually the wife that has the issues with feeling like the money is mine. I go out of my way to let her know all the money is ours. It was her idea to re-focus on the discretionary accounts rather than just paying from a joint account.
   
   Retirement - this is the first year I've ever been able to max out my 401k ($16.5k) and I'm still planning to fully fund both our Roth's at $5k each so I think we're doing OK there.
   
   Credit cards - I never carry a balance. I make hundreds of dollars and several hotel stays per year off the rewards programs. I love CC's!
   
   EF - Pathetic. No where close to 6 mths of expenses saved. My wife's surgery just dented it mightily too. So, it's a focus for 2010.
   
   Proportionality - I like the idea of paying for essentials based on the proportion of what you make to your spouse. I like it a lot. It allows each spouse to pursue their passions regardless of how society rewards the career choice monetarily. It, unfortunately, does not work for us b/c my wife's income is variable as a psychologist dependent on the number of therapy clients and testing cases per month. To revisit the proportionality monthly would be burdensome and cause us to over-focus on the "fairness" of it all which isn't really healthy for our marriage if that makes sense.
   
   Definition of discretionary - it seems like several folks have intimated that discretionary is everything not joint. That's interesting to me and worth considering. Right now things like buying work clothes or dry cleaning them would fall into joint for us. As would both our automobiles and insurance.

Thanks again for your thoughts.