Thursday, September 5, 2013

Envelope Budgeting for Busy Families

Posted by Devin

Jake and I have always been really good record keepers when it comes to our family finances. Since 2002, a year and a half into our marriage, we have written down and categorized ALL of our expenses. I'm talking if we purchased a can of soda at a machine we wrote it down. We did this in an attempt to stay on top of our financial situation and make sure that we were not over-spending (you'd be amazed how those sodas can add up if you're not paying attention). It was a pretty good method, we didn't spend more than we were making, but we also didn't really save anything either. There was not usually a lot of extra money sitting around when say a vehicle broke down or we wanted to go on a vacation or had to sign up three kids for soccer and buy everyone cleats and a new ball for practice (ugh). We'd have to pay for it and then spend the next two months trying to catch up. I hate being behind, I want to be ahead! So about a year ago we decided to take a different approach to how we manage our money and the difference is amazing!

The Envelope Method

I'm sure you've heard about using envelopes to itemize your money before. This is definitely not an original idea of ours in any way, shape, or form. But it works so I wanted to share how WE have used this system to budget and save money. "Save money"... it has a ring to it, no? Here's what we do:

Know Where You Spend Your Money
This will require you to keep track of what you are spending your money on for a few months. Write down everything: how much you spent and when and where you spent it. You can use personal finance software to to do this such as Quicken or Mint, but we simply record everything on a spreadsheet on our computer. Simple and free. (We also use an amazing app, free as well, but more on that in a minute.)
 
Categorize Your Expenses
Now that you have written down what you are spending your money on, categorize everything. Here is an example of a typical couple's categories: Home Loan Payment or Rent, Car Payments, Utilities, Groceries, Gas, Entertainment, Personal Shopping, Kids Activities. We'll call these categories Regular Expenses. Things you usually spend money on during every pay period. (Note: I will be giving lots of examples for categories, but it is up to you to determine which categories you need.)

Decide What You Should Save For
Think about major expenses that occasionally occur that you might need to be saving up for. Here are some of these categories you might include: Vacation, Christmas, Medical Expenses, Auto Repairs, Vehicle Registrations, Insurance, Emergency Expenses. We'll call these categories Irregular Expenses, expenses that only happen once in awhile.

Budget Your Paycheck
Now that you have a list of categories (Regular and Irregular) where you spend your money, it is time to decide how much money out of each paycheck you want to allot to each category.
 

1. Begin With Expenses You Can Not Control
These would include categories like House Payments, Car Payments, Auto and Home Insurance, Vehicle Registrations, and Utilities. Some of these are Regular Expenses (pay monthly) and some of these are Irregular Expenses (pay annually or bi-annually), but they are all specific amounts that you know to expect and that you must pay in full. Allot enough money from each paycheck to cover these expenses. Here's how you do this: 

If you are paid weekly or bi-weekly, you will need to figure out how much of each paycheck you need to cover once a month payments. For instance, if you have a home mortgage payment of $1000 a month and are paid bi-weekly, you would need $462 per paycheck to cover the payment. That's $1000/month multiplied by 12 months and divided by 26 paychecks a year. Follow this process for all monthly payments to know how much money comes out of each paycheck to cover these costs.

Equations to follow for:

Monthly Payments
$_____ per month x 12 months / _____ paychecks per year = $_____ needed per paycheck

Annual Payments
$_____ per year / _____ paychecks per year = $_____ needed per paycheck

Semi-Annual Payments
$_____ every 6 months x 2 / ______ paychecks per year = $_____ needed per paycheck
 
Keep a list of how much money is needed from each paycheck for each of these categories with a running total of how much money you have left over to budget with, like this:
 
Paycheck = $    X    amount of dollars
 
House Payment = $   A    amount of dollars needed per paycheck
Car Payments = $    B     amount of dollars needed per paycheck
Auto and Home Insurance = $   C    amount of dollars needed per paycheck
Utilities = $   D    amount of dollars needed per paycheck
 
Budget Money Left = $  X - A - B - C - D = $    Y     amount of dollars left to budget with
 
2. Budget Regular Expenses You Can Control
Things you can control include categories such as Groceries, Gas, Entertainment, Personal Shopping, and Kids Activities. Yes you probably HAVE to spend money in these areas (unless you want to try to restrict yourself to pinto beans and Ramen and hole up in your house like a hermit), but ultimately you do control how much of your paycheck makes its way into these categories. 
 
Be realistic when you are setting these budgets. Look at what you have spent on average in these areas over the last few months and determine a budget that will work for you in these areas. Feel free, of course, to try to tighten these budgets as you see fit. I actually enjoy the challenge of trying to stay below my budgeted amounts each pay period. Nothing feels better than extra money left over and the freedom to spend it on (or Jake would say, save it for) whatever you like! But if you normally spend $200/week on groceries, don't suddenly budget only $100/week and expect to be able to make that happen. Maybe try for $175/week? $150?
 
Once you have budgeted money out of your paycheck for each category, our running total should look like this:
 
Budget Money Left After Mandatory Expenses = $   Y    amount of dollars
 
Groceries = $   E    per paycheck
Gas = $   F    per paycheck
Entertainment = $   G    per paycheck
Personal Shopping = $   H    per paycheck
Kids Activities = $   I    per paycheck
 
Budget Money Left = $  Y - E - F - G - H = $    Z     amount of dollars left to budget with
 
3. Decide How Much To Save For Irregular Expenses You Can Control
So now hopefully you are still in the positive on the $Z amount of dollars left to budget with. If you are in the red at this point, that is NOT GOOD. It means you are spending more than you are making and it is time to figure out where you need to cut back. Turn off your Directv, limit your cell phone service, stop making weekly trips to the mall, eat at home instead of eating out... whatever you need to do to make sure that there is money left over at this point. Because this is where the "saving money" comes into play. This is what keeps those broken down vehicles (or stuck trucks in middle of the desert), unexpected medical bills, and spontaneous beach trips from ending up on credit cards. 
 
Irregular expenses you can control include these categories: Vacation, Christmas, Medical Expenses, Auto Repairs, Miscellaneous Savings (for any other emergency or unexpected things). You may be saying "I can't control unexpected medical expenses or auto repairs!" That's true, you can't. But you CAN control how much of your paycheck you choose to save up for when these things occur. It's up to you how much you put into these categories. Jake and I see how much we have spent in these areas in the past and then decide how much we would like to save for them in the future. Decide how much money you need or want for each of these categories annually and then divide those amounts by how many paychecks you get in a year. 
 
It is so, so nice when a vacation comes around and the money to pay for it is already in our pocket. Much easier to really enjoy our vacation knowing we won't be suffering for it later. The same thing goes for Christmas. Who wants to still be paying for Christmas when it's almost time for Easter?! Not me. Also, saving for things like auto repairs and medical expenses takes the financial stress out of an already stressful situation.
 
Ok, so let's spread out what's left of our $Z dollars!
 
Budget Money Left After Mandatory Expenses and Savings = $   Z    amount of dollars
 
Vacation = $   J    per paycheck
Christmas = $   K    per paycheck
Medical Expenses = $   L    per paycheck
Auto Repairs = $   M    per paycheck
Miscellaneous Savings = $   N    per paycheck
 
If there is any money left over, put it into your Miscellaneous Savings. It never hurts to have extra in this emergency envelope.
 
Your entire paycheck should be accounted for now. You have budgeted it into each of your various categories and are ready to start living within your budget system.
 
How To Manage Your Budget
This is a 2 step process for Jake and I.
 
1. We record everything on our monthly spreadsheets on our computer. Again, this keeps us organized, shows us where we spend our money, and helps us to determine our future budgets.
 
2. In order to see how much we are spending per pay period and what we have left in our budget categories or "envelopes" on a daily basis, we use a wonderful phone app called EEBA (Easy Envelope Budget Aid). This app is THE BEST. You set your budget categories as individual envelopes, tell it how much money you are budgeting for each envelope and how often you will be re-filling your envelopes (how often you receive a paycheck), record your expenses as you go, and the app shows you how much money you have left in each envelope! It also tells you whether you are over-spending in any area based on how many days are left until you are paid again. Jake and I both have this app on our phones so we always know where we stand with our budget.
 
 
Not only does this app keep track of the things you are spending money on regularly, but it also shows you how much money you have saved up in your Vacation and Christmas envelopes and so forth. For me, this app is a must. Can not say enough good things about it.
 
Cash or No Cash
Some people like to do all of this budgeting with actual envelopes containing their cash in them and that's fine. However, I hate dealing with cash, especially when I'm getting gas and I have a car full of kids that I don't want to walk away from. And what happens if I'm sitting in a McDonald's with the boys (envelope containing all of our cash for eating out tucked away in my purse) while Jake is across town and wants a taco? It gets complicated real fast, trust me. Yet another reason why I love the EEBA app. You can still use your debit card as long as you are keeping track of all of your expenditures on EEBA. For envelopes where you are saving money, you may also choose to take out the cash and keep it in a safe in your home (or under your mattress?), but if you want to just keep it all lumped together in a savings account in the bank, the EEBA app will keep track of how much belongs in each envelope for you. Just make sure occasionally that the amount in your savings account equals the total in your savings envelopes. ;) Cash or no cash, this app gives you the freedom to decide how you would like to manage your money.
 
Checks and Balances
Just a quick tip: If you are going to follow this envelope method, you may want to cross-check what you have written in your check book not only with your bank statements but also with your EEBA transactions. Forgetting to record expenditures in one place or another happens sometimes, but if you cross-check things once in awhile you usually catch anything you may have missed.

Customize Your Budget for Your Needs
I have given examples for different budget categories and weekly and bi-weekly paychecks, but I know that every one's financial picture will not fit neatly into these formulas. Some people are paid on commission and have very irregular paychecks, some people have expenses that I haven't even touched on in this post... It is up to you to figure out what your needs are and customize your budget to meet them.

Ways This Has Changed How We Live
1. Less Stress - Knowing that we are not spending more than we are making, not having to try to juggle money and make ends meet, and being able to pay for everything up front has made so many financial stresses we used to deal with simply disappear. And less financial stress equals a happier home.

2. We Spend Less Money But Get & Do More - Living within a set budget DOES mean that we have to say "no" to purchases more often. Sometimes that means skipping a night out and staying in or walking away from something we were thinking about buying. This system forces you to prioritize what you are spending your money on. It used to be that we would spend our money on things that weren't very important to us and then when something came up that we really wanted to do or buy, there was no money left to spend on it. We now have the money to do the things we really want to because we walked away from less important things.

3. Guilt Free Spending - When we buy special things for ourselves or splurge on a night out, we don't feel bad about it any more because we know we are making it work within our budget. And if we have something we'd really like to purchase that doesn't seem to fit in the budget, we try hard to save in other areas so we will have enough money to get it, guilt free. We are much smarter with our money now: less likely to make purchases we will regret later and more able to treat ourselves.

4. Prepared For Emergencies - One of the boys needs a bunch of dental work done? No problem, we have money saved in a "medical expenses" envelope for that. The car needs new tires? No problem, we have money saved in an "auto expenses" envelope for that. You get the point. Being able to cover these costs as they occur is THE BEST.

5. Better Vacations & Christmas - Specifically setting aside money for these things means better quality holidays. Again, less stress, less guilt, more money to spend on them... all in all: better.

Last Word
In addition to using this envelope system, it is always a good idea to be saving for retirement and investing. If you are able, try to fit this in to your budget as well. We like to save for these things before we even receive our paycheck. But ultimately this system is about living within your means and being prepared. It is not going to make you rich (you'll have to go talk to Warren Buffet or someone for info on that), but it may keep you from being poor (aka drowning in debt) and bring you greater peace of mind. And maybe a prepaid trip to Disneyland for 6? ;)

Linking Up With: The Shabby Nest, Practically Functional, Just Us Four, Tatertots and Jello, A Night Owl Blog, Pink When, I Should Be Mopping The Floor

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7 Comments:

At September 5, 2013 at 10:32 PM , Blogger Caitlin Nalder said...

I loved this post! Have you read the total money makeover? We read that after we were first married and did the envelope cash system for a while and stopped and are starting it again so is was great motivation for me. And I'm excited to use the app!

 
At September 6, 2013 at 7:33 AM , Blogger Kerith Gaines said...

Great post! We recently discovered YNAB (it is budgeting software, but comes with a TON of free online classes, and 4 easy steps). I could never get past the whole setting up a budget to actually FOLLOW the budget, so YNAB was awesome for us. It seems to go well with Dave Ramsey's philosophy on budgeting, and basically works out to be an electronic envelope system. We are still working towards "using last month's income for this month" instead of paycheck to paycheck, but we are getting there!

 
At September 7, 2013 at 10:31 AM , Blogger Tara and Devin said...

Thanks Caitlin! Yes, we have read it as well. The envelope system rocks and EEBA is so great, I know you'll love it! ~Devin

 
At September 7, 2013 at 10:33 AM , Blogger Tara and Devin said...

That's great Kerith! And thanks for the info! ~Devin

 
At September 12, 2013 at 2:50 PM , Anonymous maria at inredningsvis said...

WOW SO cute pics in here:) your blog Is fab and Im now followoing.

Check out my blog...Swedish dream house inspiration:)

Have a great weekend dear

LOVE Maria at inredningsvis - inredning it's, Swedish for decor :)

 
At September 15, 2013 at 2:27 PM , Blogger Beth @ Incomplete Guide to Living said...

We are currently working on our budget too! In fact I posted about using the envelope system to organize your budget while traveling this week!! Just popped over from the link party Palooza..these are great tips!! Thanks! :)

 
At September 17, 2013 at 9:21 AM , Blogger PJ @ Planned in Pencil said...

Oh the joys of budgeting, this is a great breakdown of working up a budget! Thanks for sharing on the Pinworthy Project Party!

 

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