Basic Accounting: Short Term vs. Long Term Expenses

Greg Novak novak at ucolick.org
Tue Sep 27 16:47:02 EDT 2005


I'm looking for suggestions about how to solve a basic accounting 
issue--perhaps there's a standard solution, but my attempts so far have 
failed to produce a silver bullet.

I simply need to know if I'm living beyond my means by keeping day-to-day 
cash flow rigidly separate from infrequent, large bills and purchases. 
Here I define "short term" as being entirely contained within one month 
(the frequency with which I balance my checkbook).  These things happen 
often enough that one month is fair average of the expense.  "Long term" 
means that the transaction extends over several months.  It could be 
semi-annual car insurance payments or the process of saving up for several 
months with the goal of buying, say, a bike.

What I've done for some time now is balance my checking account to exactly 
1000 at the end of every month, transferring the excess/shortfall to/from 
my savings account.  That works pretty well, but fails in two cases: 
1) Say I've saved up $1000 to buy a new bike--I can't spend the money 
directly out of my savings account, so I have to transfer it to the 
checking account and then spend it.  This makes the account look funny for 
the month because I've spent so much more than the "nominal" amount.  2) 
Credit card purchases.  It's easy to rack up debt and still (incorrectly) 
feel good about myself because I don't realize that I've overspent until 
the bill comes.

I fixed problem #1 by getting a savings account that allows me to write 
checks.  Then I can spend saved money straight from the savings account.

Problem #2 is still giving me trouble.  I can see three solutions:
1) Cut up the credit card
2) Keep a separate tree of expense accounts for "day-to-day expenses" and 
"long term expenses."  Then I could infalliably see if I've spent too much 
on day-to-day expenses in a given month by checking the expense accounts 
rather than the asset/liability accounts.  However, this is horrendously 
inelegant.
3) Group asset/liability accounts into "Day-to-day cash flow" and "Long 
term cash flow."  That is, the account tree would look like:

--Short Term
----Checking
----Cash
----Credit Card
--Long Term 
----Savings

This would go against the seemingly near universal practice of grouping
accounts by asset/liability.  However, it would have the nice effect that 
credit card purchases couldn't sneak in and wreck the books.  The down 
side to this scheme is that it may clash with the physical bank accounts. 
Ie, I couldn't use the _same_ credit card for both short and long term 
purchases.

Thoughts and suggestions are welcome, up to and including "You should just 
do X, that's what everyone does and it works fine."

Thanks a bunch,
Greg


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