I recently wrote an article only my other blog, Military Money Might, about the benefits and drawbacks of only getting paid once a month as opposed to the traditional paycheck methodology of employers paying us on the 1st and the 15th. The article basically goes on to say that there is almost no benefit to only getting paid once a month. In fact, nothing but trouble can come from it unless you are the most dedicated budgeter. And, no matter what my friend J. Money says on his blog, budgets are definitely NOT sexy!
So, recently, I received an email from a reader asking me how my monthly budget was broken down. Because my wife and I get paid twice a month, we have most of our bills spread out between the two paychecks. In the very beginning of the month, we pay our mortgage, electric bill, water bill, and insurance payments for our cars, life insurance, and umbrella insurance policy. The second half of the month, my wife and I see the bills come due for our car payments which are our only big payments during that period. So, Matt asked about the variable costs of life and when we budget for things such as food, gas, and spending money. Great question! Believe it or not, my wife and I budget for the rest of our expenses with our American Express card. Sounds crazy, right? Stick with me for a second…
Understanding The Difference Between A Fixed And Variable Cost
What I have basically described above is a spilt between items in our budget that can be classified as fixed and variable costs. Don’t let your eyes glass over. I won’t bore you with textbook definitions. All you need to know is that a fixed cost is something that does not change from month to month such as your mortgage or rent. Every month I owe the bank about $1,100 for the wonder house my wife and I live in. That’s a fixed cost. Every month, my nasty electric cooperative tells me that I owe more and more money to them because I’m using too much power. While I know that that cannot possibly be true, they nevertheless tell me it is and they send me a bill that continues to rise every month. That is a variable cost. The price of my electricity varies based on the amount of kilowatts my family uses.
Use Your Charge Card For Variable Costs
I wanted to ensure that everyone understood the difference between a fixed and variable cost because what I tell you next may blow your mind. My wife and I use our American Express charge card to budget and pay for all the variable costs. Let us take a fictitious budget to use as an example. If I bring home $4,000 per month net after taxes and my fixed costs are $1,800 per month for those things like the rent and car payments, then I have $2,200 per month that I can spend on variable costs such as gas, food, going out to eat, spending money, and other things like that. My wife and I use our American Express charge card to pay for everything else that is not a fixed cost. We use it 99 times out of 100 when we buy something or need spending money for something. We both have a card in each of our names linked to the same account.
Now, I understand that this crazy method will not work for everyone, but it is something that works great for my wife and me. There are three important things to keep in mind about this plan. We use an American Express charge card and not a credit card to pay for these variable costs in our budget. A charge card requires that we pay the entire balance off at the end of every month when the bill comes due. Another great feature of this plan is that we use a reward card to pay for all of those other items. We even use the charge card to pay for things like our television cable service and the bill from our alarm company. We rack up an enormous amount of reward points this way, and we spend them on gift cards around the holidays giving them to our friends as presents. And, finally, my wife and I are religious about checking the outstanding balance of our American Express card. We probably check it once a day or once every other day to make sure that we do not charge more than our $2,200 that is allotted for variable costs.
Will this method of budgeting work for everyone? Most certainly not, but it does work for my wife and me. It works beautifully. It is a system that we have perfected over the past ten years. Be careful if you are trying it, but I challenge you not to dismiss it as “crackpot” right out of the gate. Give it a chance if you are struggling on how to account for all of your variable expenses in your monthly budget.
What do you think? Crazy? How do you account for your variable expenses every month?
(photo credit: Shutterstock)