Setback Accounts as a Family Budgeting Tool

Separate Checking for Irregular Expenses Helps Control Spending

Aug 4, 2009

Expenses that don't come regularly are a problem when starting a budget. A separate checkbook can help establish budgeting discipline and improve family finances.

The car insurance is due quarterly; the life insurance annually. Tree cutback is needed every two years. Vacation, Christmas, home maintenance, and personal property taxes are examples of expenses that are paid at an interval that doesn't coincide with a paycheck. When a family or individual begins to live on a budget (i.e. a cash flow plan) these expenses are one of the biggest hindrances to success.

Irregular Expenses can Ruin a new Budget

Dave Ramsey, creator of Financial Peace University, says personal finance is 20% knowledge and 80% behavior. In setting up a budget, the knowledge part is giving “each dollar a name” before it is spent, even before the paycheck hits the checking account. The behavior part is learning the discipline to stick with the plan.

The planning part for irregular expenses is not all that difficult, but it is critical for budgeting success. Here are the essential steps.

Figure 1 shows a sheet of hand calculations of irregular expenses for a family that is paid twice a month. The expenses to account for are:

As can be seen in the attached figure, this comes to about $170.00 per pay period. Figure 2 shows the same calculation on a spreadsheet, but includes some longer term expenses that the family knows is coming. As can be seen on that figure, adding in those extra expenses requires that only $10.00 more per pay period be set back. This is much easier to do than come up with hundreds of dollars that wasn't planned for.

A Separate Checking Account Can Help Establish Spending Discipline

For the person who is just beginning to live on a budget, discipline is often the biggest problem. Poor spending habits and lack of financial planning can ruin a budget. If money is accumulating in the checkbook because Christmas is near and the auto insurance will soon be due, the temptation to take that money and make an unplanned purchase is strong, sometimes too strong to resist.

An alternative is to open a second checking account, called the setback account, and deposit the setback amount in it from each paycheck. Then pay those irregular expenses from that account, and pay expenses that come monthly from the regular checking account. This helps the setback money to be somewhat unseen until it is needed and less likely to be misused.

A drawback to this system is the need to balance two checkbooks, increasing the time to manage family finances. However, time spent on finances is actually a good thing when beginning the budgeting process. In fact, to some extent it was lack of time spent understanding where all the money was going that brought up the need for a budget. So while the time needed is unpleasant, it is worthwhile. Another drawback is possibly duplication of banking fees. But these are usually small, and again, are worthwhile when discipline is being established.

Pay Regular Expenses From the Regular Checking Account

Expenses that fall due monthly should not be paid from the setback account. They should be paid from the regular account. This is one of the potential problems with using a setback account. Confusion between accounts can occur, and the wrong account be used for the wrong purpose. This can be overcome by sticking notes on or in the checkbook, especially the setback account checkbook, to serve as a reminder of what bills are to be paid from that account. Separate styles of checks and checkbook holders will help as well.

Setback Account Should be Seen as Temporary

The setback account need not be a permanent feature of the family’s finances. It is for the purpose of establishing discipline in spending: if the money is put in the setback account, it won’t be blown on needless things. Establishment of discipline will take different times for different people. For some a year might be sufficient. Others might need two, or even as many as four years, before they feel that seeing a larger than normal balance in a checking account will not be a temptation to over-spending. Each family should know themselves and when they can eliminate the dual accounts.

The setback checking account has been proven a valuable tool for many families. The discipline of planning, combined with the hindrance to overspending or unplanned spending, helps the money to go farther in each paycheck.

The copyright of the article Setback Accounts as a Family Budgeting Tool in Personal Budget Creation is owned by David Todd. Permission to republish Setback Accounts as a Family Budgeting Tool in print or online must be granted by the author in writing.