Budgeting that's easy (even fun) and actually works!
When my wife and I got married in 2008, we knew we needed to figure out a way to handle our finances. Neither of us had a stellar history of dealing with money, and we didn't want to fall into the trap of fighting about it all the time either. We tried a couple of different budgeting systems online, and slick as they were, we weren't keeping our spending under control. Finally, we tried the envelope system, and it worked! We've been using the envelope system for budgeting every since. It's very simple and takes a lot of the frustration out of budgeting. In this article, I'll explain how to get started and also some of the practical logistics of making it work on a day-to-day basis.
What is the envelope system?
The envelope system is very simple. It involves getting out cash from the bank and dividing it into several physical envelopes labeled as different categories (We use zip-lock bags because you can close them and change won't fall out). When you need to buy something, you only use cash that's in the envelopes. When the cash is gone, you can't buy anything!
Setting up Your Budget
The first thing you need to do if you haven't already is to figure out your budget. First, figure out the total amount you make per month. Next, list out all your recurring monthly expenses (i.e. cable bill, cell phone bill, credit card bills, rent, etc). These are usually expenses that have a set amount each month. Subtract all your recurring monthly expenses from your monthly income. What you're left with is the amount of disposable income you have left to budget with envelopes.
Recurring Expenses: $3000/month
Money available for envelope budgeting: $2000/month
We've found that it works best to divide up envelope money every week. So with the previous example, you would get out $500 each week from the bank and divide it into your envelopes.
Dividing Up the Money
Once you've figured out your budget, its time to setup your envelope categories. Get a bunch of zip-lock bags and use a permanent marker to label each bag as a category (i.e Food, Gas, Clothing, etc.) Don't forget to make envelopes for things that require you to put a certain amount aside each week. These things might include saving for vacation, a new computer fund, or doctor visits. Organize your envelopes in order of priority and always put money in the essential envelopes first, like food, gas, toiletries, etc. Once you have the essentials covered, you can move onto things that you want to save for. It's amazing what you're able to accomplish if you plan for it. For example, let's say you want to go on a $3000 vacation to Europe in 2 years. All you have to do is put $30 in an envelope each week. You'll hardly feel it but when the time comes you'll have the cash you need to go on that dream vacation!
What if I have to use my debit card?
With the envelope system, it's best to use cash whenever possible. However, there are always going to be times where that's not possible. Maybe you forgot your cash. Maybe you're buying something online and need to use your card. How does that work with this system? One way to handle this is to create a "To Deposit" envelope. If you need to spend money on your debit card, put the amount you are going to spend in the to "To Deposit" envelope and deposit that money in the bank. That way you will have accounted for it in your envelope system but you'll also be able to use your card.
If you use your debit card and don't account for the money, be sure to account for it next time you divide up your money. I usually look at the transactions that took place on the debit card over the last week. If there are transactions that weren't compensated by the "To Deposit" envelope, than that money has to come from somewhere. In order to keep with your budget, you should subtract any debit card transactions that weren't accounted for from the total Envelope amount you'll get the following week. So if you normally take out $500/week but you had $100 of debit card expenses that you didn't account for, you would only take out $400 to divide between your envelopes the following week. If you don't do this, you're not really sticking with your envelope budget and you're overspending!
Take Control of Your Money! (Don't let it control you)
There are many different techniques for budgeting. At the most basic level, it's simply setting a limit for how much you will spend and sticking to it. This is easier said than done! If you don't have a budget, it is very stressful because you know you don't have unlimited resources but you don't really know how much you can spend. So you end up overspending in the midst of much stress and worry. Or if you do manage to spend less than you make, it's more by luck than by sound planning. However, the envelope system can make it much easier to stick to a budget and also manage one.
If you have a significant other that you share finances with, it's important to decide together what your budget will be and divide up the envelope money as a team. That way, you both agree on how money is being used and you can avoid a lot of conflicts.
While this system has worked great for us, it may not be the best system for everyone. What's important is that you find a system works for you and enables you to stay on budget with as much ease as possible. The harder it is, the less likely you'll be to stick with it. Money is a big part of life and getting it under control can make a huge positive impact. Hopefully some of these ideas have been helpful to you and make you're life a little easier!