How to Design a Budget For Dual-Income Families

The journey to financial independence always starts with a budget and on the surface that can seem very easy. Spend less than you earn or earn more than spend. Sounds good! Let’s pack up this blog thing and move on because this is easy. The reality is that most have a tough time either spending less or earning more. My wife and I were both independently frugal before we met each other and after we got married both of us were working full time making a fairly sizeable income. I attributed mine to luck and she attributes hers to hard work and dedication but either way, we had a problem … how do we design a budget for dual-income families while avoiding the downfall of most high-income households … lifestyle creep?

System Design

My computer science background and my wife’s engineering mind love processes and systems to make you do the “right” thing. By framing your mind for money, you can design a process that will get you the same results 80% of the time and spend your time optimizing the remaining 20%. To design a good system you have to set parameters to guide the process … humans would call these goals.  We set up 3 goals or parameters for our budget design.

System Parameter / Goal #1 – Lifestyle Creep. A common issue with dual-income households is lifestyle creep and the keeping up with the Jones train that everybody gets stuck on with no exit strategy. We wanted to avoid that from day 1. We like nice things and comfortable living but don’t see the value in overindulgence so set some parameters or goals.

System Parameter / Goal #2 – My wife had a request or goal of her own … her personal financial independence. She devoted a lot of time, effort and money to her education and the last thing she wanted was to have a physician husband come in and take over the reigns. She also wanted to pay for all of her student loans with her personal income. Initially, I thought this was silly and felt like a weird prenup situation but goal #2 really did lay the foundation for our families collective financial independence.

System Parameter / Goal #3 – Automation.  Since both of us had full-time jobs and a desire to enjoy our free time, we needed to automate as much of our finances as possible.  Rather than worrying about the mortgage payment or late fees on credit cards we wanted to harness the power of technology and automation.

Framing A System

With our system parameters defined, we then worked on putting together the building blocks of our system with our goals in mind. Both of us had personal Schwab checking accounts because of the awesome ATM benefits and to start this we simply opened a joint checking account that would serve as an expense account.

Rather than letting the inflow be our full income from work, we came up with a predetermined amount that both of us would transfer into the joint account on a monthly basis. Initially, this was 3k per month from each of us but then when we had a kid and moved from our condo to a single family house we bumped it up to 5K.

This gave us a monthly budget of $10k and an annual budget of 120k. Now before I get attacked by either side saying that’s not enough or that’s way more than what the majority of the country makes, this ended up being the right number for us. We were able to cover our expenses, go on fun vacations and invest out of that amount. Think of this as pinching the hose or closing the opening with your finger to get a more powerful stream.

We then opened a joint Capital One Venture credit card that would handle the majority of our household expenses. The mortgage, utilities, credit card payments were linked to the joint checking. Eventually, we added a Costco credit card as well which was also linked to that checking account with auto-pay for all payments.

Vacations were a little tricky because they were not monthly expenditures (I wish) but they usually matched up nicely with the residual amount left from the 10k that built up over months. The expenses also get distributed over several months … books flights now, pay hotel / Airbnb at the end of the trip and all expenses go on credit cards which allow us a 30 day grace period. We would essentially build up a vacation fund from our monthly budget.

Finally, we budget for a fixed amount to be allocated for our joint Schwab Intelligent Portfolio creating a forced automated investing. This was added a couple of years ago after Schwab started their Intelligent portfolio system.  We both have our own personal investments and 401Ks but this is a joint account that is part of our budget and with the ease of automation we don’t really think about it and it just happens.  This minimizes our cash holdings in a checking account and keeps our money growing through investments.  Also, we move money into this account when we see too much cash built up over a couple of months.

Personal Finances

With the majority of our finances funneled through this system, this left each of us with a significant portion (more than half) of our incomes to invest or spend as we saw fit we had the makings of something pretty good. Surprise … two frugal people with a system that taps into the Loss Aversion part of their brain by leaving them with money in their personal account caused us to … wait for it … save more. We both max out our 401ks at work, my wife has the HSA account (used purely for investing not spending) and I do the dependent childcare account at work. We both have our own high yield savings and taxable investment accounts that we manage ourselves. Finally, personal credit cards for frivolous expenses that we don’t want to be scrutinized over.

Now, most will find this redundant and unnecessary but I would argue all personal finance decisions are unnecessary. Earn money … spend it. Why worry with arbitrary budgets or investment plans? Because we are human and our brain is programmed to work against our best interest. By designing systems we correct for these biases and avoid big mistakes like lifestyle creep and automate parts that we would get lazy about.

Alternative Bucket

Not all of our cash flows are contained within this 10k a month budget. Non-traditional investments like real estate and charitable giving all get allocated separately. If I see an enticing crowdfunding deal I will ask my wife if she wants in and depending on how much cash she has built up or her assessment of the deal she will go in or pass.  She recently read an amazing post about the storm brewing in crowdfunding and has been reluctant to jump in on deals.

The majority of our charitable giving is directed through our donor-advised fund. We built our giving avalanche over the years by donating cash and appreciated stocks. With the great stock market run over the past 10 Year’s, we will now only donate appreciated assets which removes the need to budget for charitable giving. Also with a pool of funds to donate from we can skip years and take the standard deduction of 24K when it makes sense without disrupting our ability to support charities.

System Results

We have used this system for the past 6 years and made a couple of adjustments like increasing our individual contribution from 3K to 5K and adding the investing portion.  I don’t have an amazing detailed spreadsheet with fancy graphs to show you the results but I can share some major milestones that were accomplished via this system.  Now I’m working on setting up alternative streams of income to pay the mortgage (House Hack 2.0) which would offset the increased childcare expenses and still allow us to keep this system.

  • Vacations to India, Italy, Spain, Paris, London, Hawaii
  • 100K invested at Schwab Intelligent
  • No Credit Card Debt
  • 25K in a 529

This is not a fancy or complicated financial model. It is literally framing your personal finances in a way to take care of your needs and accomplish your goals.

What are your budget systems and how do you avoid lifestyle creep?

— Dr. Linus

11 comments

  1. Great post. I always enjoy hearing about how couples manage their finances. Do they keep everything separate and divide up expenses, do the combine everything, or do they do some combination of the first two.

    My wife and I got married young, before we had any income at all, so our finances have always been together. I think it would be much harder for two people who have separate accounts, and are used to managing their own affairs, to then give up some of that autonomy. But I guess figuring out finances is part of being married.

    Ultimately there are lots of different ways to make the finances of a dual income household work. It sounds like your family has a great system that works really well.
    -Ray

    1. Thanks Ray!

      Every family has their own needs and sometimes going backwards and redesigning is not an option but for those early in their marriage or going through career changes it’s important to sit down and design a system.

  2. Dr. Linus, thanks for giving a glimpse in how to successful handle money with a dual income family. Being single currently I haven’t had this issue but there are plans in the future to change that status and I will hopefully be able to formulate a similar system that seems to be working perfect for you.

    Do you guys just split up the IRS/state taxes equally if your similar in income? And if there was a big discrepancy in income (likely in my case) how would you figure taxes then?

    1. Taxes are tricky and could probably be a post of its own. We messed up the first year because my wife didn’t change her withholdings and they withheld like she was a single income earner. That was a unwelcomed surprise come tax time. Luckily we made a big transfer to the DAF which helped buffer that tax bill a little.

      We end up splitting up taxes fairly equally now and had her increase her withholdings. if we owe some come tax time then I might contribute a little more but last couple of years we have been able to cover it from our joint account. We are both causing each other to be in a high tax bracket so I’m not sure there is a “fair” answer.

  3. Great system. Before kids my wife was a private practice Occupational Therapist and I was fee for service solo Anesthesia, so we were set up a little like you. We each had IRA and SEP IRA and there wasn’t much else in the bag for advantaged retirement accounts. IRA’s were limited to $2K per year investments typically in a 3% loaded fund. We didn’t separate assets beyond those accounts but joined everything we could except cars. The reason was liability (as well as ease of investment). In my state anything owned jointly by entirety is pretty much judgement proof. We had one bank account which fed everything else. I use 3 brokerages each with his and hers accounts as well as a local bank all electronically linked for ease of fund transfer. I managed all the taxes and quarterly payments as well as investments. This worked great, but eventually we adopted a couple kids and decided to home school so that changed dual income to single income but that just meant putting her accounts in idle. Eventually Roth accounts and 401K and HSA was added when I merged into a group situation not to mention UGTM accounts and state based college accounts set up for college expense (I didn’t do 529). So all in all we had something like 15 accounts floating around. For me the most important thing was a portfolio aggregator program so I could view all the hither and yon data on a single page, understand my asset allocation and risk. Our technique for bracket creep was first my wife is naturally frugal and second naturally a deal seeker.

    Second we live by the principal of Parsimony, maximum return for least risk or least expense. For example my wife wanted a mixer for baking. Instead of buying some cheap destined to fail thing I bought her a $500 (1992 dollars) near commercial grade device. We call it the kitchen tractor. It’s pushing 30 years old and is indestructible. I did the same thing with my treadmill and weight machine, bought gym quality goods. My treadmill was $4800 in 1992 dollars. It has an odometer and we’ve put an good 25,000 miles on it, also indestructible. Well worth the cost to not have to go to a gym. When I bought my wife’s diamond for her engagement ring I spent some time learning about diamonds and bought it in a diamond market in Chicago and got a good deal. Every time I’ve had it appraised the comment has been what a quality gem. The gem is one step above being able to be judged by the naked eye, meaning to the naked eye it’s flawless. In fact it only has one small flaw. I bought the setting separately. This is parsimony. It’s not the cheapest, it’s the most for the least. We compensate by not overbuying. Cars are purchased new and driven for 250K or I buy a car and pay myself a lease payment every month in an interest account. Eventually the lease payment and the residual value becomes equal to a new car. usually just as the warranty is expiring. When she wants something I figure out how to make it happen but she self governs her wants. My weight machine and treadmill was my fulfillment of her request

    For my kids I gave them things that would expand their world. As an example one kid was interested in piano. She got a keyboard. She excelled and got an upright, she became excellent and got a grand piano. Avocation became vocation and she got a paid for cum laude degree in music, and actually has a job! Again parsimony.

    My investing is guided by the same philosophy. Buying an investment has associated reward and risk. These facts are knowable. Combining non correlated assets like stocks and bonds yields a new asset also with a knowable reward and risk. Through the efficient frontier if you know the reward and risk you can buy the most reward for the least risk. From one perspective a $4800 treadmill sounds excessive and hedonistic, but what does 300 months of gym cost equal? What about the intrinsic value of not having to go anywhere to get half an hour in? Parsimony

    1. I think the word count on your comment might rival the actual post.

      I like the concept of parsimony but it’s hard to always predict if the higher investment on the front end will pay off. Bought the treadmill but then you start swimming. Buy high quality clothing but then gain or lose weight.

  4. Getting behavioral finance problems out of the way is the biggest thing that I think leads to financial success. Avoid lifestyle creep. Automate investments. Put investments that don’t require constant monitoring so that you are less likely to sell low.

    Your system seems complicated but if it works for you guys that is all that matters!!

    TPP

    1. Keeping our stupid brain from messing things up is 80% of the battle.

      I think it appears complicated but now that it’s set up we don’t really think about it.

  5. Dr. Linus, this is a great way to go about it. Automate as much as possible, figure out what you are comfortable living on, and only give yourself that “allowance”.

    Keeps lifestyle creep away and gives you additional funds to use for fun side ventures. I like this concept a lot!

    1. Thanks for reading! The allowance method keeps us both on the same page and if you want to increase the allowance then we have to go ask mom and dad (wait that’s us kinda scary)

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