The Liquid Method

Traditional budgets don’t work. The Liquid Method is an example of how necessity is the mother of invention. I developed the Liquid method in 1981 out of necessity: I had a limited amount of funds and I needed to make sure my one and only credit card’s balance never exceeded 

the balance in my checking account. That way I could always pay my credit card in full. What a concept; due to this method I've never paid one penny in credit card interest.

 

 

So, in it’s first iteration, Liquid was on the back of an envelope and it looked like this:

Checking Account Balance: $5,214.23
Credit Card Balance $1,342.15
Net: $3,872.08

This means if my credit card bill arrived today, I could pay it in full (which should be done every time it arrives) and I’d still have $3,872.08 left over.

Then I realized my checking account had to service more than just my one credit card. I had all the expenses of a recently paroled college graduate: rent, utilities, groceries, gasoline, entertainment, auto insurance and all that other stuff that makes life tolerable. 

So I had to set up a bucket and budget for each of these items.

I also realized I was to receive another paycheck for the month, as I was paid twice a month and the first paycheck was already deposited in my checking account, so the $5,214.23 figure included that check. I needed to set up a bucket for the paychecks I was to receive. It had to go on the side of the checking account since they were both things I own. The right side is for things I owe.

One week after inception, Liquid’s second iteration had advanced to a sheet of paper:

I needed to set up a bucket for the paychecks I was to receive. It had to go on the side of the checking account since they were both things I own. The right side is for things I owe. It looks like this: 

money
Checking Account Balance $5,214.23
spending
Credit Card Balance $1,342.15
Rent $600.00
Groceries $400.00
Utilites $350.00
Gasoline $150.00
money total: $5,214.23 spending total: $2,842.15
receiving
Paycheck to be received $1,200.00
saving for
Auto Insurance* $100.00
receiving total: $1,200.00 saving for total: $100.00
money total + receiving total - spending total - saving for total =
Net: $3,472.08
money
Checking Account Balance $5,214.23
money total: $5214.23
spending
Credit Card Balance $1,342.15
Rent $600.00
Groceries $400.00
Utilites $350.00
Gasoline $150.00
spending total: $2,842.15
receiving
Paycheck to be received $1,200.00
receiving total: $1,200.00
saving for
Auto Insurance *       $100.00
saving for total: $100.00
money total
receiving total
- spending total
- saving for total =
Net: $3,472.08

* Note the Auto Insurance amount is a monthly amount; I was billed once a year, so each month I budgeted 1 /12 of that amount. That way when the bill comes I have the total amount saved and it’s in my checking account. I treat all non-monthly expenses as if they are monthly.

Now that the budget is set up, it’s time to start spending

Every transaction is a duel entry; in other words, it gets entered in two places. If you go to the grocery store and spend $100.00, and it’s paid for with a check from your checking account, then your checking account goes down by $100.00 and your grocery account also goes down $100.00. That means the checking account is now $5,214.23 - $100.00 = $5,114.23; the grocery bucket is now $400.00 - $100.00 = $300.00 and the net is still $3,472.08.

 

money
Checking Account Balance $5,114.23
spending
Credit Card Balance $1,342.15
Rent $600.00
Groceries $300.00
Utilites $350.00
Gasoline $150.00
money total: $5,114.23 spending total: $2,742.15
receiving
Paycheck to be received $1,200.00
saving for
Auto Insurance $100.00
receiving total: $1,200.00 saving for total: $100.00
money total + receiving total - spending total - saving for total =
Net: $3,472.08
money
Checking Account Balance $5,114.23
money total: $5,114.23
spending
Credit Card Balance $1,342.15
Rent $600.00
Groceries $300.00
Utilites $350.00
Gasoline $150.00
spending total: $2742.15
receiving
Paycheck to be received $1,200.00
receiving total: $1,200.00
saving for
Auto Insurance        $100.00
saving for total: $100.00
money total
+ receiving total
- spending total
- saving for total =
Net: $3,472.08

Let's Keep Spending

If you spent $50.00 on gasoline and put it on your credit card, then the gas bucket would be $150.00 - $50.00 = $100.00, the credit card balance is $1,342.15 + $50.00 = $1,392.15, and the net is still $3,472.08.

Next, you pay the $600.00 rent and $250.00 for utilities. They both come out of the checking account, so those respective buckets are: $600.00 - $600.00 = $0.00; $350.00 -$250.00 = $100.00; and $5,114.23 - $600.00 - $250.00 = 4,264.23. The net is still $3,472.08.

When you receive your paycheck at the end of the month, the receivable line goes down to $0.00 and the $1,200.00 is added to your checking account balance; now the checking account balance is $4,264.23 + $1,200.00 = $5,464.23. Note that your net remains the same because you’ve subtracted and added the same amount to the same side (the left side.)

That net number is called your Liquid number and this is what’s left over if all your expenses came due right now. It’s the amount you will have left over at the end of the month after all your expenses are paid, including the portion of auto insurance you have yet to be billed for.

What’s also important to note: income is $2,400.00 per month, (as this person receives $1,200.00 twice a month) and expenses are $1,600.00 per month (rent $600.00 + groceries $400.00 + utilities $350.00 + gasoline $150.00 + auto insurance $100.00.) That means $800.00 (the difference between income of $2,400.00 per month and expenses of $1,600.00 per month) is added to the Liquid Number each month.

To recap, your budget on the last minute of the month looks like this:

money
Checking Account Balance $5,464.23
spending
Credit Card Balance $1,392.15
Rent $0.00
Groceries $300.00
Utilites $100.00
Gasoline $100.00
money total: $5,464.23 spending total: $1,892.15
receiving
Paycheck to be received $0.00
saving for
Auto Insurance $100.00
receiving total: $0.00 saving for total: $100.00
money total + receiving total - spending total - saving for total =
Liquid Number: $3,472.08
money
Checking Account Balance $5,464.23
money total: $5,464.23
spending
Credit Card Balance $1,392.15
Rent $0.00
Groceries $300.00
Utilites $100.00
Gasoline $100.00
spending total: $1,892.15
receiving
Paycheck to be received $0.00
receiving total: $0.00
saving for
Auto Insurance        $100.00
saving for total: $100.00
money total
receiving total
- spending total
- saving for total =
Liquid Number:

$3,472.08

The Wayne Gretzky Approach to Budgeting

I refer to this as the Wayne Gretzky approach to budgeting; when he retired, he was asked what his secret was to being such a great hockey player. He said he doesn’t skate to the puck; he skates to where the puck will be. Your Liquid number is not only the amount you’ll have left over at the end of the month, it’s also your emergency fund.

At the beginning of each month, you need to roll over your budget. Whatever is left in each bucket gets rolled to the following month and the budget gets added to it. On the first minute of the new month your budget looks like this:

money
Checking Account Balance $5,464.23
spending
Credit Card Balance $1,392.15
Rent $600.00
Groceries $700.00
Utilites $450.00
Gasoline $250.00
money total: $5,464.23 spending total: $3,392.15
receiving
Paycheck to be received $2,400.00
saving for
Auto Insurance $200.00
receiving total: $2,400.00 saving for total: $200.00
money total + receiving total - spending total - saving for total =
Liquid Number: $4,272.08
money
Checking Account Balance $5,464.23
money total: $5,464.23
spending
Credit Card Balance $1,392.15
Rent $600.00
Groceries $700.00
Utilites $450.00
Gasoline $250.00
spending total: $3,392.15
receiving
Paycheck to be received $2,400.00
receiving total: $2,400.00
saving for
Auto Insurance        $200.00
saving for total: $200.00
money total
receiving total
- spending total
- saving for total =
Liquid Number:

$4,272.08