Figuring out how to do it

What are the key components of Household Financial Management? Well, the example described in previous entries indicates that the following elements should be on the list:

  • A decision about where income should be placed (in the example, all income went into the joint account);
  • Information (in the example, this included the joint account and credit card statements, and the amounts previously spent on Items of Expenditure);
  • Actions (In the example, this included the creation of an annual budget, the allocation of statement line items to the budget items of expenditure, and the monthly update of the budget sheet and discussion between the partners);
  • Tools (In the example, an Excel spreadsheet was used to create and manage the budget, and to perform the allocations on the bank statement);
  • Discussion (in the example, all financial decisions were discussed by the couple – particularly during the monthly budget update session).

Of course, there are many different ways in which these can be addressed. A few of the myriad other possibilities are listed below:

  • A decision about where income should be placed (in the bank account of the individual that earned it; in a safe in the house);
  • Information (online check of account transactions; payment slips and receipts; personal memory of what was spent);
  • Actions (moving money to ensure the account doesn’t go into the red; giving one partner money to do the housekeeping; putting an amount every month into a savings account; planning how much to spend on next year’s holiday);
  • Tools (various software packages and apps; cloud-based budgeting services; paper and pencil);
  • Discussion (conversations when: a major spend is contemplated; when the account is about to go overdrawn; when a major loss of income is imminent; when income is received).

So, how should people setting up a household decide what approach to use? Well, the obvious thing to do these days is to check the net. A search on ‘Household Financial Management’ in May 2017 produced a whole range of web sites offering advice, insights and tools. At the top of the list was the very helpful and thorough ‘Beginner’s Guide to Managing Your Money’ from the UK’s Money Advice Service. As well as providing extensive guidance, this includes an online Budget Planner tool which goes through a very comprehensive list of types of expenditure.

Adding ‘Tools’ onto the end of the search term again produced a plethora of hits including PC Magazine’s ‘The best personal financial services 2017’. This highlights 7 applications including for spending analysis; Quicken and YNAB for budgeting; and Doxo for bill payment. Another site – Techradar – identifies the five best free personal finance software programmes 2017 as being: Money Manager Ex; Gnucash; Mvelopes; HomeBank; and AceMoney Lite.  No doubt there are many more software packages, apps, and cloud services out there.

There is clearly no shortage of practical advice and guidance available for those who want to seek it out; and there are a whole variety of digital tools that can be employed to plan and track household money. However, advice and tools on their own are not enough to make a success of household financial management. The critical element is down to the individuals concerned: they must have a determination to avoid financial difficulties and to change lifestyle if such difficulties are encountered.  Furthermore, the way that household finances are actually managed not only dictates a particular lifestyle, but also reflects the type of relationship that those in the household have. These two critical implications need to be born in mind by those who set out to establish how to run their own household finances.

In/Outs and Credit Cards

Two types of events that can complicate household financial management (HFM) are In-outs (where the money is not part of the budget but just passing through the account); and the use of credit cards. The way that these aspects are dealt with in the HFM example previously described, is outlined below.

In/outs occur when, for example, a purchase is made on behalf of someone else and that person pays the money into the account either before or after the payment is made. The example Budget Sheet deals with this by employing two line items: ‘In/out Spends’ and ‘In/out Balance’. The total of all In/out monies going out (negative amounts) and coming in (plus amounts) in a particular month is entered in the ‘In/out Spend’ cell. The In/out Balance cell is calculated by adding this month’s In/out spend amount to last month’s In/out Balance. To keep track of what each amount refers to, a comment is attached to the cell, recording each individual transaction that makes up the cell total.

It may be useful to give specific types of In/outs their own few lines on the spreadsheet. For instance, in the example Budget Sheet, separate lines were provided for the expenses of one of the partners because the employer paid expenses to the same account that the salary was paid to. Hence, train tickets and other travel expenses were paid out piecemeal from the joint account and the money was reimbursed as a total amount at the end of each month. The line items used for this were ‘Expenses Spend’ and ‘Expenses Balance’.  The same principle can be applied to any kind of In/out transaction.  To make it even clearer in the spreadsheet of what is coming in and going out, the In/Out spend line could be separated into two separate lines – one for ‘Incoming Money’ and one for ‘Outgoing Money’.

Credit card transactions are another potential complication for month by month Budgeting, though they do have one significant benefit; they provide a statement in advance of when payment has to be made, which gives time for the impact on the budget to be assessed, and for any necessary actions to be taken. However, they also bring with them two complications. One is that the statement is paid as a total amount, so that the individual actual amounts that the total is made up of have to be identified and then placed on the budget sheet separately. Secondly, refunds are often made in a different month to when a purchase was made; and sometimes – at least for the credit card used in the example – the refund amounts in line items on the statement are not reflected in the statement total – which can be very confusing.

In the HFM example, the Statement partner allocated each line item of the credit card statement to a particular Item of Expenditure on the budget sheet. Then, when the end of month budgeting was done, the actual credit card amounts were inserted into the relevant cells for the following month when the total credit card bill was to be paid. This meant that, at the monthly budgeting session, a quick review could be done of the following month’s expected expenditure and bank balance in the knowledge that some of the figures were actual outgoings from the credit card.

The way refunds are dealt with by the credit card in question, however, is not something that the couple concerned have been able to find a standard way of dealing with. Instead, the partner who manages statements makes sure that one way or another the refund amounts and associated purchase costs, are reflected somewhere on the budget sheet. Sometimes the In/out facility is used or else a manual note is made which can be referred to when the next statement comes through.

Annual Budgeting & Items of Expenditure

In the household financial management example described previously, annual budgeting is done around September/October/November each year. The initial setup is simple – the partner responsible for the budget sheet makes a copy of the current budget sheet and then reviews and modifies it. Generally speaking , a notional increase for inflation is applied to most annual charges such as Council Tax, Insurances, Subscriptions, etc.; and for the remaining items, the monthly figures are reviewed by considering a) the actual expenditure that has already occurred in the current year; b) any need to reduce expenditure, c) any particular activities or changes in the coming year that will impact the likely expenditure on that particular item. This exercise produces a draft which is printed out and given to the partner responsible for Statements who goes through and marks up suggested changes. Finally, any uncertain points are discussed by the couple, after which the partner responsible for the budget produces a final version.

It is worth noting at this point that the budget sheets are designed to be printed out on a single A4 page – any bigger would just not be very useful. To achieve this, the margins are set to ‘Narrow’ and the spreadsheet or printer setting ‘Fit to Page’ is selected. Although this reduces the size of the text, it should still be readable unless there are a very large number of rows. The current version of the example Budget Sheet we have been discussing has 97 rows and 15 columns and this is certainly readable when printed out on a single A4 page.

The creation of the new budget is also an opportunity to review and modify the items  of expenditure. Some of these, such as Housekeeping, have appeared on every  one of the 27 yearly budget sheets. However, others, such as Childminder for example, appeared only on the earliest four budget sheets, and in the final year of its appearance there was no actual expenditure recorded. This illustrates how the items of expenditure often stay in place until they no longer have any actual expenditure for a year or two at which point they are removed when a new annual budget is drawn up. An analysis of  all the items of expenditure that have ever appeared in any of the 27 years of budget sheets, and the number of years that each one has been present, shows that there have been  about 80 items of expenditure of which about a quarter have appeared in every year. In summary, while some items of expenditure are generic and will probably apply to most households, others will reflect the immediate circumstances of an individual household. It is an important aspect of annual budgeting to ensure that such new categories are identified and included on the budget sheet as early as possible before the expenditure actually occurs.

To provide a guide to Items of Expenditure and to the overall structure of a budget sheet, the items on the example Budget Sheet have been generalised to eliminate specific products, services, subscriptions etc. This has produced a list of 65 Items of Expenditure of which 38 (about 65%) are deemed to be ‘core’ i.e. likely to be of use in a large number of households.

One way of doing it

This entry describes one way in which household finances can be managed with the support of digital technology. The story starts in 1981 when two newly-weds decided to direct all their incomes into a joint account and to move monthly allowances for personal expenditure from the joint account into their respective personal accounts. For the next ten years they developed an approach to budgeting for the year ahead and monitoring it on a monthly basis. This was before the era of on-line bank accounts, and money management involved scrutinising paper bank and credit card statements. So, most of the work was done on paper, by hand, and, initially at least, in a piecemeal fashion without any standard layouts.

One of the partners had gained experience of spreadsheets at work; so, after acquiring an Atari computer around 1987, they obtained a copy of the EZ-Calc spreadsheet software for Atari and started using it to create and manage their yearly budgets. The experience they had already gained in managing their accounts enabled them to list their standard items of expenditure down the side of the spreadsheet, with the months of a single year along the top.

Of course, the line items in bank and credit card statements did not necessarily align to the standard items of expenditure in the budget spreadsheet; so, in order to update the spreadsheet with actual expenditure, it was necessary to identify which items in the budget sheet each of the statement lines were referring to. This is something that the couple had already been doing to a degree; however, the use of the spreadsheet introduced a need for a greater level of rigour in this exercise. For, in order  to ensure that the end of month figure on the bank statement matched the end of month figure on the spreadsheet, all the amounts on the bank and credit card statements had to be correctly allocated to one or more expenditure categories in the spreadsheet.

During this initial foray into spreadsheets, the couple’s responsibilities became more delineated. One took responsibility for looking after the budget sheet, and the other took responsibility for the statements and for allocating the line items in the statements to the items of expenditure listed in the budget. By about 1992, they had established a regular routine whereby each month, after the partner responsible for allocating the statement line items had completed the work, the two would sit down together in their joint study where the Atari was located, and one would call out the total expenditure in a particular budget category and the other would replace the budget figure with the actual figure in the relevant spreadsheet cell. At the end of this exercise a check would be made to ensure that the end of month figure in the bank account statement and in the spreadsheet were the same. If they did not tally, then further checks were made to establish the error and fix it. Finally, the couple reviewed the month-end figures for the remainder of the year, discussed any expenditure cuts or additions, and made any agreed changes to the future budget. Afterwards, a copy of the updated budget spreadsheet was printed out for the partner responsible for the statements.

In 1993, the partner responsible for the budget spreadsheet changed his computer at work from a Macintosh SE to a Compaq PC laptop. In the same year the couple moved to a bigger house in which they each had their own study and the Atari was moved into one of the children’s bedrooms.  These two events – conversion to a PC and the move of the Atari – prompted a change from using EZ-Calc for the budget spreadsheet to using Excel on the PC laptop. The portability of the laptop enabled the couple to conduct their monthly discussion in the study of the partner responsible for the statements.

Up until the year 2000, the bank used by the couple had no online banking service and all statements were sent out in paper form. The allocation work was all done on these physical documents. However, a few years into the new millennia the couple started to use the bank’s online banking service and eventually chose not to receive paper statements in favour of downloading them.  Having got used to this approach, the couple devised a spreadsheet to facilitate the allocation process; the statement information was copied and pasted into the extreme left columns of the spreadsheet and all the budget items of expenditure were placed into the subsequent columns along the top of the spreadsheet. In that way the cash amount of a line in the bank statement could be allocated to one or more columns of expenditure categories. A checking column was included next to the column showing the cash amount, and this was programmed to say OK if the total amount in a particular row in the expenditure columns was the same as the cash amount of that line in the bank statement. If the amount was different the checking cell would say ERROR. At the bottom of the spreadsheet the sum of all the values in each expenditure column was automatically added up, and it was these figures that the partner owning the statements was able to call out to the partner owning the budget spreadsheet.

This was the last major change that the couple has implemented. There have been a few developments since then but they have not made a material difference to the way they manage their finances. For example, the credit card statement is now also available electronically, however the allocations for that are still undertaken by hand on paper; and, since about 2015, both partners have been accessing the joint bank account via an app on their phones and iPads – but this has only afforded a more immediate awareness of particular transactions and the overall position of the account.

In 2015 the couple moved again, and in their current house have established the practice of conducting their monthly update sessions in the more comfortable setting of the lounge. They both have their laptops on their knees, and continue to operate their well-practiced routine. The Excel spreadsheet now has 26 worksheets – one for each of the last 26 years. It works for them for the moment, but, as past experience has shown, it may have to change to adapt to changes in technology or circumstances.

More details about the mechanics of the arrangements described above are provided in subsequent entries. These will cover: annual budgeting and items of expenditure, credit card expenditure, and in-outs and other exceptions.

The backdrop to Household Finances

Before exploring digital support for household finances, it is important to understand the environment in which today’s household finances are managed. First, the vast majority of households in the UK have access to some sort of bank account according to the University of Birmingham’s Financial Inclusion Annual Monitoring Report 2015. Second, the monies that flow in and out of households today are generally digital monies; pay is delivered by electronic funds transfer; regular bills are paid by direct debits; and much expenditure is made using debit or credit card. Thirdly, people manage their money using on-line bank accounts and bank account apps on their mobile phones. In essence, most households are already brushing up against digital technology in some form or another when managing their money.

The final key aspect that critically affects household money management has nothing to do with digital technology, and everything to do with the relationship between the householders. When a couple set up a household, one of the most significant choices that they make is to decide which account(s) their income is to be banked. This simple decision not only reflects their attitude towards money but also has significant ramifications for the way they will communicate and work together to deal with the day-to-day practicalities of household living. This was item a) of six household management activities that were listed In the previous entry, and the decision impacts all the other five activities – b) checking the monies coming in; c) deciding what to spend the money on; d) deciding who is responsible for what element of spending; e) checking what has been spent; f) assessing future levels of cash and deciding on any actions required to change those future levels.

The broad options for deciding where income is to be banked are straightforward:

  • each individual’s income goes into that individuals bank account and stays there;
  • each individual’s income goes into that individuals bank account and a portion of it is automatically transferred to a joint bank account;
  • each individual’s income goes directly into a joint bank account.

In the first case, when the monies go into an individual’s account, the other person may have no visibility of the amounts going in nor how it is spent; and this can make discussions about household spending a little less open and free-ranging. At the other extreme, if both individual’s income goes into a joint account, both parties are likely to have much more knowledge about income levels and to have a greater sense of ownership of the combined monies. The middle option, when part of an individual’s income goes into a joint account, is a half way house whereby individuals will have knowledge and ownership for part of the monies.

These three approaches are huge simplifications of what actually goes on. I haven’t been able to come across research data on this, but conversations with family, friends and colleagues over the years, and things I’ve read in books and articles and have seen on TV, indicate that there are many different ways in which each of these options can be performed in practice. For example, just because income goes into an individual’s account doesn’t necessarily mean that the other partner doesn’t know how much it is, or can’t access the account. There are also many different reasons why a couple may choose one of the three options; for example, they may decide to put income into an individual’s account because the other partner may have a poor credit history. Despite these uncertainties, however, the three different options will usually have some impact of the sort described; and will almost certainly affect what digital tools are chosen to assist the management of household finances .

Households and Money

Most households have some amount of income and/or expenditure which has to be managed. The way these monies are looked after can vary from minimally to intensively, and will probably involve one or more of the following activities: a) deciding where the income should be placed; b) checking the monies coming in; c) deciding what to spend the money on; d) deciding who is responsible for what element of spending; e) checking what has been spent; f) assessing future levels of cash and deciding on any actions required to change those future levels. In today’s environment of on-line bank accounts, freely available credit cards, and a consumer oriented society, these activities can be demanding for a household of a single individual. However, they become even more complicated when the household comprises more than one person, since some sort of communication and coordination will also have to occur in order for the money to be  managed. Different couples deal with this challenge in different ways: however, this journey is not attempting to explore the many different approaches that can be taken. Instead, it documents just one single approach – the way that my wife and I have learnt to manage our own household finances in this new digital era.