One piece of financial advice that I often see offered is this: If you are part of a couple, give each other a measure of freedom with the money you earn but consult each other on any purchases over $100. In some variations the consultation amount is $50 or even $20. Whatever the amount, the idea is to give each partner some freedom and an ability to spend without answering to the other on every little purchase. It’s reasonable advice in that it keeps one partner or the other from feeling like a child and like he/she is going begging every time they want to buy something, but as a way to manage a budget it’s not very sound.
Why? Because it’s as easy to sink a budget with little purchases as with big purchases. I saw this played out with a couple that I am friendly with. They created a budget so they could work on their debt. They agreed that they would each be able to purchase any item under $30 without consulting the other. Anything over $30, other than gas, groceries, repairs, or bills had to be approved by the other spouse.
“It was a reasonable plan, we thought,” the wife told me. “But we still ended up deeper in debt.”
“What happened?” I asked.
“We both bought too much stuff that was under the limit. We kept thinking that it was okay, since it was all under $30. We never counted on the fact that so much stuff bought under $30 could sink the budget.”
It sounds like this should have been obvious to this couple, but it wasn’t. It turns out that what was happening, in addition to simply buying too much, was that both of them were deliberately breaking up purchases to come in under the limit. For example, in the pre-budget days the husband thought nothing of dropping $150 on an order of DVD’s, books and CD’s from Amazon. After they implemented the budget, he realized he couldn’t do that anymore but rather than curtailing the spending, he started breaking the orders into smaller pieces that came in under the $30 limit. She, in turn, was adding unnecessary items to the grocery cart (shopping at Super WalMarts and Targets make this a real problem) in order to avoid notice. Since “groceries” could be over $30 without approval, she rationalized throwing an extra DVD or purse into the cart during a grocery trip as “grocery spending.”
“Our credit card statements looked ridiculous,” she told me. “There were all these charges, for $28.95, $29.00, or even $29.99. Then there were the $300 ‘grocery’ trips to WalMart to feed a family of two. We were both trying to cover up our spending by hiding it under the $30 limit or sliding it in with other, necessary, purchases. We assumed that if it was under the limit, it couldn’t be doing that much damage. But when you multiply $30 times 50 purchases, it’s $1,500. And when you do that enough, it kills you.”
This couple thought they were doing the right thing by granting each other some autonomy in deciding how to spend their money. But it went wrong for them. So what could they have done differently?
I’m not a fan of this “consultation” system because what happened to this couple happens often under such a system. However, it can work for some couples, provided they address their spending habits. Setting a purchase limit and then just blindly hoping it works out almost never works because if there is a spending problem, this system does nothing to cure it. But if a couple is willing to sit down and talk about what they spend money on and why and get to the root of the problem, they might be able to reach a point where the urge to spend is less and they can trust one another to spend responsibly. Once that level of understanding and trust is reached, the consultation system can work.
I’m a much bigger fan of an allowance system, used in conjunction with a sturdy budget. It sounds juvenile, but it is a much sounder way to manage the budget. Each pay period, each partner is given a specified amount of money to spend however they want. The amount is taken from whatever is left over after the bills are paid and the joint savings goals are funded. They don’t have to consult the other on the purchases, but once that set amount of money is gone, it’s gone. A partner may choose to bank several week’s worth of allowance money in order to afford a bigger purchase. Regardless of how they use it, when the money runs out there is no more until the next allowance period. The reason an allowance needs to be paired with a solid budget is so that purchases cannot be hidden, either. If you know you have $100/week to spend on food (and that’s your normal range), you’re less likely to add in all the extra stuff in your cart because you know your partner will find out that you’re way over budget if he/she looks at the spending. This system keeps spending in check and addresses overspending problems.
Either system requires trust and active discussion on each partner’s part. In order for these systems to work, both partners have to be accountable to the other for their spending (not the what, but the how much) and be willing to live within the rules (not bend them until they break as this couple did). They both also have to be involved with the budget to they can tell when something has gone awry and address it before it gets out of control. The consultation system is more open to “loopholes” and interpretation than the allowance system and can be more problematic. It’s fine to set a spending limit, but only if both partners understand that they still cannot go hog wild with purchases just because they are under the limit.