Tuesday, December 19, 2006

Easy Cash Budget - Envelope System

Some people simply do not like to budget (go figure). It's understandable, though. Budgeting can take quite a bit of time in the beginning, especially if you create a spreadsheet yourself, from scratch.

There is a simpler alternative to saving all of your receipts and keeping track of every dollar spent. It's the Envelope system. With this method of budgeting, everything is done with cash.

Here is how it works. Cash your paycheck and divide it up for each spending category you have. Put the amount needed for each category in an envelope and write the category names on the envelopes. Put all the envelopes in a safe place until money is needed for an expense.

Let's try an example. You get your paycheck for the week and cash it. You know you will need money for rent, gas for the car, groceries, the electric bill, the phone bill, the bill for cable TV, some money towards Jr's school clothes in the summer (school starts in 6 months), money towards insurance for the car (due in 6 months), and something for entertainment.

OK, that's 9 envelopes. Label each envelope and write the amount needed for the month on them. Divide the amount needed for the month by how many paychecks you get that month. For example, if you get paid weekly you will divide the monthly bills by 4.
  • Rent - $350/4 = $87.50
  • Gas - $50/4 = $12.50
  • Groceries - $250/4 = $62.50
  • Electric - $100/4 = $25
  • Phone - $35/4 = $8.75
  • Cable - $50/4 = $12.50
  • School Clothes (needed in 6 months)- $100/6 (months) = $16.67 (a month)/4 = $4.17
  • Auto Insurance (due in 6 months) - $350/6 (months) = $58.34 (a month)/4 = $14.59
  • Entertainment - $20/4 = $5
Technically, there are an average of 4.3 weeks per month, but I always use 4 because most months have 4 weeks. This adds in an automatic cushion that should carry over each month.

This cushion should be put into an envelope labeled "Unexpected Expenses." It will be used when the car needs a new tire, or everyone gets sick and you need to buy a zillion dollars worth of vitamin C and cold medicine.

Place the calculated weekly amount into each labeled envelope and put all of the envelopes in a safe place. When you are ready to go food shopping or a bill is due, take the money from that envelope and pay that expense.

Once the envelope is empty, there is no money left for that category of spending. If you find that you run out of money before your needs are met in certain categories, you will need to re-work your budget, or find a way to cut back spending in that category.

The Envelope system works fine for a family with basic budgeting needs, as long as they have the needed discipline to stay out of the other envelopes when one is empty. This method of budgeting removes the need for listing each dollar spent, and offers the ability to see how much money is left in each category by simply opening the envelope.

Just remember, Do not spend the cushion money (Unexpected Expenses) unless a real emergency occurs. (Eating out is NOT an emergency)