Budgeting Envelopes - I'm In Love!

Sometimes it takes a few attempts at something before you actually "get it" and succeed.   Such is my walk with Budgeting Envelopes!

If you've heard of Dave Ramsey at all then you've heard of using this method for keeping track of your money.   However, it's not Dave that won me over on this one; it's Crystal Paine, the author or The Money Saving Mom's Budget. 

Crystal has a way of explaining and walking you through in such a practical way, that I'm really getting it this time.   Maybe it's because she's speaking from a woman's perspective - speaking in my language - that it's hitting home for me in a way that it hasn't before.

So, I spent several days last week setting up our household budget for 2012, and I'm here to share some details about my system, in hopes it will inspire someone to try something similar.  (For all the great reasons why you should do this, get Crystal's book.)

The first step I took was setting up what Crystal calls a Bare Bones Budget.    This helped me so much!   I have created many budgets in my lifetime and the simple ones are the only ones that ever seem to work.   If you've ever read any financial books, then you know that the budgets get so detailed, you feel like you are trapped in this never ending distribution of funds nightmare!

However, with the bare bones budget, you are including just the basics that need allocating, to get you started.    For me, these looked like this:

House
Insurance
Utilities
Education
Auto
Groceries
Gas
Savings
Giving
Debt
Misc.

These are the basic needs that must be paid every month. 

Now, as I broke down the Misc. category, I ended up splitting this amount into smaller portions such as:
Hair cuts
Meds
Allowance
Entertainment

I knew these would be a reality in our lives and I wanted to make sure I didn't over spend and that I was prepared when the teens started yelling about needing a hair cut!  (For some reason they don't trust me to do this anymore.  Guess they want to look good:)

The second step was to assign dollar amounts to each category, which takes a little time.   You want to zero out your budget, so that every dollar has a place to go.

Third Step is deciding how you're going to pay each category - cash, check, electronically, etc.
I pay most of my monthly bills with online Bill Pay through my credit union.  Only 1 or 2 bills are paid by check, in person.    The daily spending obviously needs to be handled in cash (hence - the cash envelopes). This isn't hard; just go down the list and mark each one "Bill Pay" "Check" "Cash". 

By looking at this list, you can now determine how much money needs to remain in the bank each pay period and how much cash needs to be withdrawn, for your envelopes.

At this step I decided to withdraw all the cash I would need for the entire month's worth of spending.  This was easier for me and the way my mind works.   If you are not able to fund your entire month's worth at the beginning of the month, then you will fund your envelopes with each pay period, and that works just as well.   In fact, if over-spending will be a temptation for you, then only get two weeks worth of cash, each pay day. 

Also, at this step, you will need to realize that getting paid twice a month will result in having to split your bills up according to due dates.   For instance - if the car note is due on the 10th, but the house note isn't due until the 25th, then these amounts will come out of the bank at different times.  (I'll talk about this in a 2nd post.)

So, once you've decided how much cash to withdraw each month, you will need to actually set up your envelopes.  (Here is where you can get as fancy as you want or stick with simple white envelopes.)

I have tried several items here - Dave Ramsey's leather bound envelope holder (really nice!), plain whites, and fancy re-usable envelopes from Office Depot.    This time I actually just pulled out an old handheld plastic, accordion-style file box that has about 10 separate slots with tabs.   (This is going along with my attempt to use up what I already own, rather than buying new all the time.)

I labeled each tab with the names of each of my CASH categories,  and once I had my cash in hand, I divided up the money into each slot.    You could choose to use small white envelopes here and just fit them down into the sections, which would be good for holding your change and pulling out an entire envelope when needed.     This will take some trial and error, to actually see what works best and to your liking.   For instance, the sections of my file box are not closed on the bottom, so my loose coins are sliding back and forth!  I can see myself adding the envelopes very soon or maybe just one in the front slot, for coins only.    Either way - do what works, that way you won't be tempted to give up!

Another step I took here was to divide my total amount into weeks.  For instance, in the Allowance section, I divided the total amount into 4 weeks and used a small sticky note and paper clip, labeling them by "Week 1" , "Week 2", etc.    Each Friday I reach in to that pocket, pull out the corresponding week's worth and distribute it.   Simple as that!    I do the same with Groceries and a few other categories. 

There are some categories that are just left whole and I reach in, as needed, and pull out enough for each transaction.    An example would be Gas.   I have allocated a certain amount per month, but I didn't divide it by week, because each week varies.   Sometimes I can go two weeks on one tank.   However, I can still look in the Gas section and see what I have left and know where I stand. 

So, divide each section according to your needs.   This too may change as you work out your system.

I also keep the small sticky note pad in the front slot of the file box.  This allows me to write notes, if I don't have a receipt to explain a transaction.   I keep the receipts in each section as the money is spent, so I can look back and evaluate how I'm doing, at the end of the month.

Make a decision about how your left-over cash will be handled (if you have any) at the end of the month.    If you have over-spent in one category, but didn't quite need every dime in another category, then you might have to tweak the amounts allocated.    Some people decide to place all the extra into savings or a special fund.     Just see where the needs are and do what works for your family.  

The best tips I have for making the envelope system work is THINK AHEAD as much as possible.   The impromptu shopping trips or coffee breaks are going to be the downfall of your attempt at this, unless you set aside a specific amount for such things.   Since using the envelopes, I have said "no" to little treats like smoothies (way overpriced anyway) and snacks when we traveled.    It gives you a new look at what's worth your money and what's not.

But, overall, the feeling of satisfaction has been SO worth the effort!  It's amazing how "freeing" boundaries can be!

If you have any input or ideas that have worked for you and the Envelope System, I would love to hear them!

The next post will be about Allocating Funds. 

See ya then!