Budgeting - Dr Jekly vs Mr. Hyde
IfÂ you are reading this article I assume it is because you are
(a) a person who knows they need to manage their moneyÂ
(b) You do not do it very well.
They say the first step to change is admitting you have a problem, so congratulations. I used to beÂ a Dr. Jekyll & Mr. Hyde when it came to money and spending. Sometimes I would be good and pay all my bills on time, diligently save 10% from every paycheck for a rainy day, and give to charity.Â Other times Mr. Hyde would come out and I would blow a huge wad of cash on an impulse buy ( car, trip, any and all i-devices). This split personality I had with money originated from the fact that at any one time IÂ had only a vague idea of how much money I had in my bank accounts.Â Â Over the years I have tried many different types of budgeting strategies and software (excel sheets, ibank, quicken) etc. What I found was most of these systems were too abstract and time-consuming .Â I was spending half my time spending money and the other half trying to plug the numbers into a spreadsheet, after the fact, to see where it all had gone.
Budgeting - The Ultimate tool for Doing what You Want
The way to win this war between your rational responsible side and your emotional pleasure oriented side is to keep a budget. Most of us believe keeping a budget is a Dr. Jekyll thing to do. The truth is keeping a budget gives you the power to use your money the way you want vs the way you should or the way you feel like at this moment. By keeping track of how you spend your money and coming up with a plan that endlessly creative mind will of yours will come up with ways to fulfill your obligations AND have some fun. Now instead of being a square with your money and always being responsible and never doing anything fun or being completely irresponsible and blowing the rent money on a trip to Vegas you can use the power of a budget to get pay your bills AND go to Las Vegas.
Your Mother Knows Best - Why Enelope Budgeting WorksCredit: experian.com
I was reintroduced to a the concept of enevelope budgeting one day during my wanderings through the internet. AfterÂ having continously failed with my other systems I was trying to find a new way to do things. I finally came across EEBA , a free online envelope budgeting software.
What is Envelope Budgeting ?
Envelope budgeting has been around forever. By forever I mean my mom used to do this when I was a kid. This type of budgeting is done thusly
(a) Take some enevelopes and label them with your basic spending categories (groceries, bills, fun )
(b) Pick an amount for each envelope, usually what you would spend in a month, and put that amount of cash in each envelope ( $100 in groceries, $500 in bills, $100 in fun).
(c) The money in each envelope was designated only for that particular activity once you ran out of cash you stopped spending. So for example once you blew through your fun envelope on day three of the new month you would not pull money from the bills envelope .
The genius of this system is that it is immediate feedback on your spending.Â Before I had fallen in love with pie charts, spending reports, and portfolio tracking.Â These were features that most modern personal finance software offered. All theseÂ were bright shiny objects that in the long run did nothing for me and my spending money like a rock star ways.
EEBA - Online Envelope Budgeting System
Combining the best of the Old School with the New School
Truth be told most of us are not going to be walking around with envelopes stuffed with cash labeled "groceries" and it would be silly not to take advantage of the internet & modern technology. The trick is to find something that replicates the simple immediate feedback of envelope budgeting with the convenient "access from anywhere" of a web app. Â This is where EEBA comes in.
EEBA was specifically designed to be a digital version of envelope budgeting. It has several advantages which I like:
a) It is a web based program so you can access it from computer
b) It is available as an app for both iphones & Android based phones (free)
c) It can be accessed offline
d) It can be accessed by multiple users, so like a real envelope, more than one person can dip into it.Â
Â How does this work in the real world ? Well Lets say you are at home and your spouse is out grocery shopping. You can decide to rent a movie online using your "fun" envelope. Meanwhile at the grocery store he deducts $100.00 using his iphone for that weeks groceries. Then, since you already rented the movie, he decided to pick up some chicken wings. He can look at the "fun" envelope and see the updated balance (minus the movie rental).Â
Free vs Paid
The Free version is literally a digital version of enevloped you stuff with cash. The paid version is for keeping track of your account balances as well. I use the paid version but for the intents of this article the free version is sufficient.
Tips for Setting up a Budget on EEBA
..And How to Stick with It Once You Do
Setting up a Budget on EEBA; KISS
Step one choose your envelopes. The trick is to use as many as you need and as few as you can get away with (The free version allows you a max of ten envelopes) . So for example I tend to break up my financial life like this:
Fun (this includes eating out, going out and doodads )
Thats it, no fuss, no muss, no pie charts required. If you still feel like you need a pie chart or cashflow report to track every nickel you spend you can create labels for each transaction. For example in the Bills envelope you can tag:
#carpayment (car payment)
#carinsur (car insurance)
#carrep (car repair)
To generate reports on a breakdown of your automobile expenses. If you don't know how much you spend in any one category ( for example "Fun") Just create an empty envelope and keep track of expenses for 30 days.Â
#1 Tip for Using EEBA
You have to treat it like an actual envelope full of cash. So make it a habit before you pull out the plastic to check the balance of your envelope using your smart phone . This way you won't make the mistake of overspending. If this proves to be too much of hassle you can always just carry a bunch of envelopes with wads of cash in them, like your mom used to do. Once checking your envelope becomes a habit, I promise you, it will free you up to start using your money the way you want to versus the way you think you should or the by impulse.
A Tip for Credit Card Users
There are those among us who use credit cards instead of debit or cash. The same principles apply with just a tiny tweak.Â Firdst things first
1) Set up as many of your bills to be due at towards the begginning of the month as you can
2) Set your credit card bill to be due towards the end of the month.
3) Know your Credit Card Statement Closing Date.Â Â
4) Set up an automatic payment to your credit card from your checking on or just before the due date so you dont get hit with finance charges.
Once the set up is done this is actually an even more hassle free way to deal with your finances plus you get the added benefit of getting cash rewards points. Special thanks to Ramit Sethi from I will Teach You To be RichÂ Blog for the tips on how to automate your finances.
How will this work ?
Lets say your "Bills" envelope is budgeted for $500.00.Â Your "Grocery" envelope is $200 and your "Fun" envelope is $100.
You've set it up so that all your bills are automatically paid from your credit card by the 14th of the month. Your credit card is due on the 20th, the payment will automatically deduct from your checking on the 20th.
Using EEBA you check your envelopes you on the evening of the 19th and you see that you have spent a total of $780.oo combined for all your envelopes which means on the 20th you will have $780.00 deducted from your checking. In the meantime you see that you have a balance of $100.00 in your Grocery envelope and $20.00 in your Fun envelope. Your card is already paid up for the month and thanks to EEBA you can continue using it AND stay on track with your spending plan.