How we manage our finances as a lean and growing entrepreneurial family
Money — the thing we so earnestly seek, yet so badly administer.
Everyone has their own way to manage money. Sadly, many people are not in the driver’s seat at all, with unnecessary debt and other financial burdens taking the wheel.
Four years ago I developed a finance system that would enable me and my family to achieve our goals. Our system is ever evolving and is built upon solid principles that we believe in as a family.
This system is not perfect, but it has kept us afloat during highs and lows and is the backbone of all our money-related decisions.
Over the years dozens of friends and colleagues, intrigued by my behaviour, have asked me about our system: what tools we use, how we track expenses, how we allocate income, etc. So I decided to share it.
1) The envelope system — a timeless practice
The envelope system is a very popular method for visualizing and maintaining a budget. The basic concept is to write on the front of an envelope the name of an expense and its average monthly cost. When you get paid, you put the cash within the envelope, only taking it out when an expense is due.
We use a customised digital envelope system to organize our spending, not just for bills, but for everything.
We call our envelopes pots. We like to imagine pots of gold.
Our current pots are:
- Fun Pot (eating out, movies, fun activities, miscellaneous stuff)
- Groceries Pot (supermarket, corner store, la feria)
- Cleaning & Beauty Pot (detergent, toilet paper and shampoo need to be separate from food)
- Transport Pot (taxi, Uber, gas, subway, etc.)
- Rent & Utilities Pot (mortgage payment, internet, phones, Netflix, electricity, water, etc.)
- Medical Pot (visits to the doctor, baby and pregnancy related stuff)
- Luke’s Pot (whatever I want to spend money on: food, clothes, books)
- Andrea’s Pot (whatever my wife wants to spend her money on)
- Noa’s Pot (my daughter is less than 2, she doesn’t get to decide how her pot is spent. This is where we add her expenses such as diapers, milk, clothes and all the other expensive baby jazz)
As a family we agree upon the total allotted amount to each pot.
The sum of all pots is always significantly less than the total income we receive as a family. This is how we guarantee savings each month.
Let me repeat that in another way.
Total income > Sum of pots
2) Join multiple income sources
As a family we don’t believe in the concept of “This is my money. I earned it. I spend it how I want.”
I know a couple where this ideology ruled their relationship and consequently caused a lot of grief. One day the husband came home with a new PlayStation 4. The wife was furious. She reminded him that they were trying to pay off the car before incurring other expenses. He told her that it was his money and therefore he had the right to spend it as he saw fit.
You can see how the “My money. My way” attitude can create rifts.
This doesn’t happen in our family.
If both of us are working, we pool all income streams.
We set our savings goals based on the total income as a family. We then allocate the remaining amount after savings to our monthly pots.
Regarding the personal pots: it doesn’t matter if one partner earns more than the other, we both receive the same amount in our personal pot. This money is ours to spend as we please. But it’s always equal.
3) Goodbudget — our expense tracking tool
We use Goodbudget, a web and mobile app on ios and android, to track our day-to-day spending.
Do I love this tool? No. But it’s free and does the job. Besides, I haven’t found anything better and now I’m in the habit of using it.
Goodbudget is simple to use. Every time you spend money, you open your phone and add the expense to one of the pots.
We don’t sync the app to our bank accounts. Firstly, it doesn’t work with non-US accounts, and secondly, syncing with your bank account doesn’t consider how you spend cash.
We add to Goodbudget every single outflow of money, via cash or card, no matter how small or insignificant. For example, in Chile we tip the packing guy at the supermarket. We add that tip to the groceries pot.
This system only works if you commit to adding every single outflow of money. It takes serious discipline. Soon it will become habit. After every single lunch or excursion, you will pull out your phone and add the expense (hence why I get so many questions). Or you can wait until the evening to do it in private.
The key is consistency. This won’t work if you only occasionally add expenses or are constantly adding retroactively, trying to remember when and what was spent.
We don’t use Goodbudget to track our savings; it is simply a tool to monitor how much we have spent in the current month and how much is left in our pre-defined pots. The app gives you the possibility to carry the balance (negative or positive) of each envelope over to the next month. We never do this. At the end of each month, if there is any money left in the pots, we simply clear the pots and then re-fill them for the start of the new month.
4) Gamify the pots
The envelope system forces you to prioritize what to buy, when to buy and which pot to decrease.
The beginning of the month is easy because everything is super charged — all pots at maximum capacity.
The month begins with a boom. You go out to eat with some friends. You go to the movies. You buy some new jeans. All of a sudden its Wednesday on week 2 and all pots are 2/3 empty.
That’s where it gets fun.
Your friends invite you to a new restaurant in town. Looking at the app, you realize that you have already blown the fun pot, but you want to go anyway. So you allocate the expense to the groceries pot (hey, it’s still food). That’s fine, it just means that you have less money to spend during the next food shop.
Then Pepe finally gets married. Whoops, wasn’t planning on buying a wedding present this month. Where do you allocate that expense? You could take some of it from fun (because a wedding is fun) but you remember that the fun pot is empty. The end of month is close and you see that the transport pot has hardly been touched (you walked to work more often this month). Bingo. You take half the cost of the present from the transport pot and deduct the other half from your personal pot.
You can see how it gets crazy towards the end of the month. It’s all about trade offs, creative allocations and prioritization. It’s fun.
Remember, the goal is to never over spend the pots. Rather than go into negative in a pot, allocate to another one.
The sum of the pots is your line in the sand. Don’t cross it.
5) Google Sheets — our master budget and forecast
For tracking savings we use Google Sheets. At the end of every month we take a snap shot of our current financial status. We look at our bank statements and wallets to calculate the total amount of readily disposable income in that given moment. We then subtract any overdue payments. This gives us our current savings.
Once we have our current savings for that end-0f-month period, we do a simple forecast for the next 3–6 months.
Because we know exactly how much we spend each month (the total of the pots), it is easy and accurate to forecast ahead.
Are there surprise expenses?
Always. That is why we do the financial snap shot at the end of the month to update the forecast.
This forecast has been incredibly helpful for making decisions such as when to pay the down payment on an apartment, when to purchase flights or when to renew a computer or phone.
Our forecast tells us when we can buy stuff without going into debt or how fast we can pay something off.
6) Extra ordinary or big expenses
There are always expenses we don’t anticipate or plan for. Most of these are small and are easily absorbed by one of the existing pots. But sometimes the expenses are too big and we have to dip into our savings. My phone breaks. Baby needs a new car seat. Flights home for christmas. There is always something.
Whenever we need to draw from our savings to cover big or extra ordinary expenses, we agree upon the decision as a couple. It is always mutual.
7) Monthly family council
Once a month we hold a family council to discuss, among other things, our financial performance in relation to our goals.
Family council is a time to review whether or not the budget allocation is too high or too low and, if necessary, make modifications to the pots.
One important observation arose from a recent council. I realized I was spending the majority of my personal pot on lunch and snacks, leaving little left for other things I want or need.
Now we cook extra each night and I take lunch to work. I eat healthier and I spend less of my personal pot on food.
Insights like this materalize only if you set aside time to measure and track how you spend money. Without this visibility, you have no idea if you are spending too much on taxis or Starbucks.
8) Flexibility to adapt
Are our pots set in stone? Absolutely not. Over the last 4 years we have had to adapt our budget many times. We became parents, welcoming a host of new and exciting monthly expenses. Then my wife’s student loan payments began to kick in. And to spice life up, I quit my job to start my own company. All of these changes required minor (sometimes major) tweaks to our budget, from the types of pots to the amounts we allocate to each one.
We have learned to be flexible, otherwise the system breaks. We want something sustainable in the long run.
Do we sometimes to say “Screw it!” and just splurge?
Yes. But not often.
When we do it feels good. No guilt. We know we have savings and a system that will adapt and get us back on course.
9) Higher income = higher savings
This is an obvious one. But your’ll be surprised by how many people fail miserably at this principle. As their income rises, so do their expenses in equal proportion.
A pay rise isn’t a green light to drastically increase your spending.
As our total income as a family rises, we appropriately increase our spending by raising some of the pots (usually groceries, fun and personal). Although we raise total expenses, our savings increase much more significantly.
It should look something like this napkin doodle.
Of course, in real life, income isn’t alway up and to the right. But you get the idea. Your expenses shouldn’t increase at the same gradient as your income.
10) Credit cards and other debt
Yes, we do use credit cards, mostly for international transactions and recurring payments, but we always have the money to pay off credit card debt the same month.
The only debt we have is a mortgage and a student loan.
For big purchases such as computers, phones and flights, we pay in cash with our savings. In some extra ordinary situations, such as a down payment for a house or a car, we pay with credit, but based on our forecast, we know with confidence that we can pay off that small debt within 2–3 months max.
11) Needs vs. wants
We always ask ourselves two questions.
Do we need this? Or merely want this?
More often that not you merely want something.
The second questions is
Can we afford this?
There is nothing wrong with buying stuff you want if you can afford it. If you can’t afford it, be patient and save.
Ingredients for success
Over the last 4 years we have learned a lot about what it takes to operate as a unified family team. Without these core ingredients, your system will fail.
Honesty and transparency
No hiding expenses under erroneous titles or intentionally forgetting to add a purchase.
Thick skin
Don’t worry about what others think of you. People will jokingly call you “cheap” and “budget.” People will tell you to relax. “Just pay it off later.”
Be disciplined. Have thick skin. Don’t be swayed by those drowning in debt.
Patience and perspective
Learn how to control your wants and impulses. Your’ll be surprised to find what happens when you are a forced to wait a few weeks to purchase something. You realize that you no longer want nor need it.
Adopt the perspective that you are building wealth and that you don’t need to have everything now.
Alignment of goals
If you are in a relationship, make sure you and your partner are totally and utterly aligned with what you want to achieve. Reigning in the spending of a partner through force or manipulation is painful and leads to bitter unhappiness. Make sure you both desire the same goals and are willing to sacrifice today in order to build something tomorrow.
I am grateful for a wife who has demonstrated time and time again that she is willing to sacrifice the wants of today in order to achieve the greater goals of tomorrow.
Here is a small truth I rarely share with people. You will soon find out why.
These are our wedding rings.
What would you say if I told you that they cost $1 each?
I’m dead serious.
They cost us $1 each.
We decided to forego expensive rings in favor of a better honey moon and to have more money in pocket when we got married. The plan was to upgrade to better rings later in life. We still haven’t done it yet.
Every year we throw out our rings and buy a new set. It has become a tradition. Though last year the prices increased to $2 a ring. Those pirates!
I don’t usually share this fact because most people can’t even tell if the ring is real gold or fake. And when I do share it, many have told me that I went “too far” or “too cheap.”
I would rather be “cheap” than the guy still paying off his expensive wedding ring that he lost on his honey moon (true story — it happened to a friend).
At the end of the day, a ring for us is a symbol of unity and commitment, nothing more. Price has nothing to do with it.
How grateful I am to have a partner that shares this view.
Are we happy?
Yes we are.
Do we live a controlled, rigid life without joy?
No we don’t.
We work hard. We travel internationally at least once a year and do awesome trips within Chile.
We are able to eat out often, cook delicious food, dress our daughter with nice clothes and own the latest tech (although we may not be the first to buy it).
We are free of crushing debt that cripples the ability to make decisions.
This feels good.
Slowly but surely we are moving towards our goal of financial freedom and independence.
