Case Study 01: Dividing Household Expenses

Today, we have an exciting thing: the first in this blog's Mail Call case study series!  I've accumulated a backlog of a few of these over the last few months, and I'm looking forward to posting them soon.

I always love receiving and responding to mail, so feel free to shoot me a message if you have something you'd like me to look into.  If you're lucky, our interaction might even be immortalized in these hallowed pages for all the world to see.

$L—name changed to protect the innocent!—writes in from Pennsylvania, seeking advice on managing expense tracking in a multiple-adult home with rather complicated expense splitting:

In light of reading your blog I am wondering one thing -- do you still think Mint is an optimal tool for managing expenses? I have had it for about a year, and really only used it for three months and then there was a very rapid drop off in my use. And this may be due to the way I use it rather than some inherent flaw in Mint.

It doesn't track cash expenses unless I manually enter that in. I found this to be tedious esp. since I was using a pile of cash to help manage my budget -- ie check out a bunch of cash and try to make it last until the next check-out.

So, two questions for you:

Mint, used differently--or something else?
Using Cash to monitor my spending -- bad idea? Basically I don't stick very well to it -- I run out of cash, and then squeeze a little more out or just switch to cc. So am wondering if I should just go fully digital with payment? I feel ridiculous putting a local coffeeshop on a cc.

Perhaps I am being silly. Your thoughts on this welcome.

I dislike cash for several reasons:
  1. no straightforward way to track expenses
  2. no accountability (in the form of a monthly statement)
  3. no cashback (and I am fairly obsessed with cashback)
  4. no protection against loss or theft
My advice would be to go all-digital.  I've used cash only a handful of times since I moved out to the Bay Area two years ago, and it has greatly simplified my financial universe.  It can feel silly to pay for little things with plastic, so if anything, it will encourage you to track and minimize those little things.

Speaking of debt: you appear to be pretty well marinating in it!  Your debt is an emergency, and 'coffee shop' shouldn't even be a part of your vocabulary until you claw your way back out of it.  We are on a mission to build up a durable financial position; a Darjeeling at the bookstore can wait.

Now, on a related topic, I think I have something challenging (!) for you. You may have already heard from $R that she, I, and her mother $A split the household expenses three ways each month. We are also splitting the cost of the house (mortgage/ownership) three ways. And finally, we are splitting the cost of the renovations three ways. There are several tracking projects that I'm in charge of, and it's getting really time consuming to a) catch up on the tracking and b) stay on top of it. I explain next:

We decided that we are not splitting everything into equal thirds. For the month to month costs in foods, gas, utilities, pet care, general maintainence, garden costs: we split into "proportionate thirds", determined to our annual incomes. Until our incomes change, (and presumably I will be earning more in a few years as I scale up the proverbial ladder), this is the rate of sharing we do. We don't wish to backpay $R's mother our full third, for these monthly costs.

However, for the house -- ie, the mortgage -- $R is currently paying $A her fair share at 34 percent, and I'm paying less than my fair share at 27 percent. This is the arrangement we made because I cannot afford to pay more now given that I have student loan payments. Once the mortgage is paid off in less than 2 years, $R and I will continue to pay $A back until we have paid off our shares to her or her estate.

Likewise for this other pile of expenses that I need track: renovation costs. These we have defined as being substantial home improvement renovations -- like replacing the roof, radon mitigation, remodeling the bathroom. Any renovations we do, $A pays for in full with a check, and $R and I do not pay her back on any of this UNTIL the mortgage is paid off. (So, yes, at some point, I will be paying off my third of the mortgage plus my third of the renovation costs while still swinging student loans---and this is why I need to get this wrestled to the ground so I can see what the numbers are). And in all of this $A insists that there is no interest owed to her - $R feels differently about the interest issue -- but that's another question that we'll address in the future. For now, assume that I need models that reflect both interest, and non-interest tracking/payment.

In sum, three tracking projects:

1) Monthy Expenses which I literally do by hand because there are three payment paths ($A owes $L, $A owes $R; $R owes $L -- you get the idea!)

2) Mortgage tracking -- right now this is obliquely lumped into the 'By hand' method for the Monthly Expenses, but I would like to be able to figure out how much each month $R and I should pay $A to complete our purchase of the full third of the house (we each get a third).

3) Renovation costs -- similar model as the Mortgage, but needs to be a distinct topic.

What tools/methods would you use? And keep in mind, not just for personal use but also as evidence to show the lawyers for $A's estate and other members of $A's family that $R and I are paying our fair shares.

Appreciate your optimization wisdom! Really like your blog. Keep it up!

For tracking large, complex, long-term, multi-person financial situations, Mint is insufficient — it simply lacks all of the hardware necessary to get the job done. But don't get me wrong! Mint is still your best option to aggregate and monitor individual bank, credit card, and investment transactions. You'll just need to add another tool to your arsenal to make this happen.

And do I have the tool for you.  I present: The Household Expense Agreement Spreadsheet!

I've been using this sheet for the past two years to keep track of finances in the apartment I share with 2-4 others. My use case is very similar to yours: we have an expense agreement, in which each house member is responsible for a certain percentage of each expense type. One person writes the rent check each month, while someone else is responsible for the utilities or the majority of the shopping. It doesn't matter who actually pays, though, because all transactions are recorded and divided up on the sheet and each house member's running balance is continuously updated. This cuts down significantly on the time and effort necessary to maintain the system, because it removes the need for each person to write a check every month to cover their share of the expenses. If a member drifts into the negative, they can pay the next big expense or make a no-cost bank transfer with Google Wallet to a member in the positive.

The sheet lives on Google Drive, so every member can access and update it from anywhere and there's no chance of losing it. Google Drive records all revision history, so you have a timestamped record of each member's changes and there is no way to 'cook the books'; this could also be useful in a situation like yours, in which actual lawyers are involved. The sheet is extremely flexible, because the expense agreement breakdown and the actual contribution by each member can be set for each transaction. Using the magic of spreadsheet filters, you can instantly cut through the hundreds of transactions to see only the ones you're interested in (for instance, 'Utilities' from the last six months).

As for the issue of potentially needing to calculate accrued interest on a series of payments, that is a textbook annuity calculation and I'd be happy to throw together a simple simulator that does exactly that. This will be very easy to do if you use this spreadsheet, because it will be straightforward to pull together a complete list of your mortgage- and renovation-related payments necessary to do the calculations.

Best of luck, $L—you have a long road ahead of you to financial independence, so keep me updated and let me know if you need any additional tools!  Hit up the resources in the Lifestyle Hub for ideas on how to cut back while you dig out.

And that wraps up the first case study.

If you're in an expense-splitting living situation, consider making your own copy of the Household Expense Agreement Spreadsheet.  It can really simplify the process of tracking expenses and zeroing-out the accounts.  Money is a frequent cause of interpersonal problems, so every little bit of simplification helps.