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Tips on How to Keep a Budget: Envelope Style

By Edited Jun 2, 2014 0 2

Managing A Budget
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So you’ve never had a budget before! Where do you start? Should you use computer software? Even the idea of keeping a budget can be overwhelming. Managing a budget is what helps us not spend too much money and go into debt. You always want to buy the latest and greatest, but don’t have the money for it. Budgeting is what helps us not spend too much, pay the bills, and even save up for a rainy day.

It’s so easy for money to just get lost by charging the credit card or spending the cash without even knowing where it’s going! Here are some tips on how to budget and stay out of debt!

Credit Cards are bad for good budgeting
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Get Organized!

Use Envelope System – Old Fashion Home Budgeting

Determine the categories of your expenses for the month and label your envelopes accordingly. Rent money would go in the “Rent” envelope, Utilities in the “Utility” envelope, and so on.

If you like to keep your money in the bank, so you can earn interest, you can make virtually envelopes in a computer program like “Quicken” or QuickBooks.” The only reason I advise against this, is that when it’s in the bank, it’s much easier to swipe that debit card and not know what’s going in or out. Consequently, if you do this, you need to keep an even tighter view on your cash flow.

Benefits of the Envelope System

Keep Bills Paid

The envelope system lets you keep track of your money better and assures you that the money for utilities is "in the bank” or envelope. When you have money put away for "utilities" you know that you are not aloud to spend it. When the time comes to pay that bill, it will already be there. This takes a lot of stress out of bills each month!

Money(101037)
Credit: Petr Kratochvil

Keeps You From Randomly Spending Money

It is also less tempting to just spend money. If you have an envelope labeled "Food," you know that when the money is gone, you don't let yourself buy any more food. You are also less tempted to take money from the “Food” section and spend it on shopping.

Budgeting the Cash

Percentage Budgeting and Planning

Okay so we covered the envelope system! The envelope system is a way of physically helping you keep track of your money. But how do you determine how much money from your paycheck should go into those envelopes or categories? After a little bit of effort, one can start budgeting their money, get out of debt and start saving! Here's how!

Get the Big Picture

First, we need to see where you are financially. If we don’t get this picture, no amount of budgeting is going to help!

  1. Determine what your bills are and write this in a list on a sheet of paper.
  2. Determine what your income is.

Let’s walk through a scenario to better understand this concept. For this example we will imagine that:

  1. Bills are $1,200/Month

            $400 - Rent

            $200 - Car Payment

            $200 - Insurance

            $50 - Cell Phone

            $50 - Utilities

            $300 - Medical

            Total = $1,200

        2. Your income is $1500/Month

The best way to do a budget is to always plan ahead, to put away extra. It's really hard to do this, because we love to spend money on frivolous things, especially when we have extra cash.

Money in an Envelope
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Overestimate Expenses

In order to help us do this, we are going assume that our expenses are actually more, and that our income is less. By over estimating our expenses, we are putting a safety net around our finances. Check this out:

            $425 - Rent

            $215 - Car Payment

            $215 - Insurance

            $60 - Cell Phone

            $60 - Utilities

            $325 - Medical

            Total = $1,300

Keeping a Budget
Credit: Petr Kratochvil

Think in Percentages

Now we’re going to turn all of our numbers into percentages. When we are looking at expenses as percentages it also helps us emotionally detach from our cash. When we get that paycheck we can just take the proper percentage and distribute them into our envelopes.

Here are the numbers in percentages:

435/1300 = .33%

215/1300 = 16.5%

215/1300 = 16.5%

60/1300 = .05%

60/1300 = .05%

325/1300 = .25%

Total = 100% (This number may not be exactly 100 because of rounding, but should be pretty close)

Now we know the percentage of our expenses. We only need $1,300 of our income to cover these expenses. So when we get our paycheck, all we have to do is multiply the percentage of each bill by $1,300 dollars and get the amount of money you need to stick in your envelope. And because they are percentages, this will work even if you get paid bi-weekly and your paycheck is $650.

For example:

$650 X .33% = $214.5 (Put this aside for your Rent later in the month)

When the next bi-weekly check comes, do the same thing

$650 X .33% = $214.5

$214.5 + $214.5 = $429 (You now have more than enough to pay rent the next month!)

Great Savings - Without even missing it

Do you see what's happening? You are actually putting more money than you need into each envelope. When it comes time to pay your bills, make sure you keep that extra money in its envelope. As time goes on, you’re accruing extra money for a rainy day in that particular category.

You might need a new phone one day. Well, you've been putting all this extra away and you now have money for that new phone. This happens "in the background" and you won't believe how much you are saving at the end of the day!

Money Growth
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Underestimate your income

Underestimating your income by assuming you are only making $1,400. Also, remember that you are only using $1,300 dollars of your income for expenses. It’s like playing a physiological game with yourself. It’s living on less money that you actually earn.

By underestimating your income at $1,400 dollars, you have an extra $100 you can automatically invest or save and not even miss it! You actually have another $100 extra because your expenses you overestimate by $100 dollars. You can put this away for something else that is special like a date with your special somone, that will surely make them smile!

Obviously the categories listed are very minimal, and this situation is an ideal. However, if you are making more money than your expenses in any way, this system could really help! It helps you know what your expenses are, how your income is going to pay them, and have extra put away for a rainy day! It puts you in a habit of living within your means! So live a financial free life!

If you have any questions about this system, feel free to comment below with any questions!

Check out this video on the envelope system!

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Comments

Jun 6, 2012 7:42am
askformore
A late uncle of mine was a fanatic 'envelope style economist'. In his younger days he was lousy to keep a budget, and he always used more money that he earned.
THEN came a turning point in his life: On a two weeks vacation abroad, he had 14 envelopes each containing his daily ration of money. However, because on his focus on cash, he didn't even use all the daily money; so the last day he could buy presents to family and friends at home. All became surprised!
The rest of his life the 'envelope style' worked perfectly.
Jun 6, 2012 10:36am
cougar8806
Yeah! It's a great system! I like using it especially with a computer program
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