Wednesday, February 19, 2014

Budgeting:: The Envelope System

It’s an exciting month in our household!  Why?  Because this month we will be paying off one of my student loans…much earlier than planned!  Wheeeeee!  I could not be more excited to get rid of it!

In the next couple of posts I plan to do a money theme, the first one starting with how we as a family do our budget.  I think every family struggles with this to some extent so I thought it this post might relate to a lot of people.

Ryan is very good with money.  I honestly think he could live off of $2 a day if he had to, and I only wish I could say the same for me.  Maybe it has something to do with being a girl, but it’s just not possible for me.  Before we started budgeting I never went spending crazy, and I always made sure to talk to Ryan before buying something expensive, but I definitely wasn't watching what I was spending!

This summer, when we decide to put our house up for sale, we agreed that budgeting needed to be one of our top priorities.  Needless to say for Ryan this was no big deal, however, I was less than thrilled.  After he showed me the math that illustrates just how much money we COULD be saving per year if we didn't have any debt, I was 100% on board.  It was crazy! 

Since October we've kicked our budgeting plan into high gear and in just four months we've already paid off one piece of debt, so exciting! 





One of the best budgeting tools we've found {and others we've talked to agree} comes from Dave Ramsey's Financial Peace University Class.  In this class he talks a lot about the “Envelope System”.  Now, I should probably note that Ryan and I have not taken Dave’s class, but we've done the research to know what the Envelope System is all about.  Unfortunately, because everyone’s finances differ, there are no step by step directions for how to do it, but here’s the system we’re using in a nutshell:

1. All cash:  Get on board with the concept of cash only.  We only use our debit card once a month to pay our bills, everything else is cash.  We even went as far as to cut up one of our extra credit cards {Dave would tell you to cut them all up, but we disagree and keep one on hand for emergencies}.

2.  Make a realistic budget.  We use an Excel spreadsheet to lay out all of our monthly 'bills' and their individual totals in one column.  This column only includes things we are billed for each month like our mortgage, student loans, electricity, cable, cell phones, etc.  We then dedicate a second column to our monthly 'expenses' like daycare, haircuts, groceries, gas, things we aren't necessarily billed for each month, but do pay for on a regular basis.  Don't forget those things you pay once a year like car registration and be sure to break it down monthly to make sure you save enough.  This gives us a good overview of just how much we spend each month, which is critical in making this system work.

3. Divide and conquer:  We then dedicated envelopes for each of the monthly “expenses” (column two on the spreadsheet).  For this, you can have as many envelopes as you need.  We’re pretty strict so we've created an envelope for almost every possible expense we can think of…even the dog has two {ha!}.

4.  Fill ‘em up:  On pay day{s}, head to the bank and get your cash...you’ll get to know your bankers quite well.   Side note:  It helps to know exactly what denominations you need your cash in.  After you've categorized each envelope, fill them up with the money you've allotted for in your spreadsheet.  For example, if you've allotted for $75 per month in clothing, put $75 cash in the envelope.  It’s important to note here that it may take a few months to get the allotted amounts for each envelope right.  You may find the first few times you do it that you've either over or under budgeted for a certain expense, but that’s ok. Make a note of it and see if you can correct it the following month.  Eventually, you’ll get it right!

5.  When it’s gone it’s gone: Warning...this is the hard part!  Once you've spent all the money in a given envelope, too bad so sad, you’re done spending for that category. If you go on a shopping spree and spend everything in your clothing envelope {guilty}, you can’t spend any more on clothes until you budget for that category again next month.

6. Don’t be tempted: Leave your debit card at home.  I've found there is seriously something psychological about spending cash, it hurts more, I swear! Haha!

That’s it! Again, each family is different, so this may not work for everyone, but it seems to be working for us!

My next post will be about another budgeting tool we use, Dave Ramsey's “Debt Snowball”...so stay tuned!