In the spirit of this month’s financial issue, I decided to offer a bit of advice for those who have resolved to live within your means because you need to get out of debt or because you don’t want to get into debt in the first place. Consider the envelope budget system my husband Doug and I have. It is the perfect personal finance tool. It’s easy to use, requires no special software or expertise, and, if followed honestly, allows you to live within your means and set savings goals for the future. It’s really easy.
First, figure out what you have coming in each month in wages and other payments. That is your monthly income. Second, break down expenses into two categories: must-pay and discretionary. Must-pay includes rent, student loan debts, credit card payment, car payment, utilities, phone, insurance. These items are most often the same amount every month and paid by check or bank draft, so you’ll not be making envelopes for these categories. However, you should note them on paper and be sure to pay them on time each month.
Subtract must-pay from income to get your discretionary expenses. That is the total you have to spend on everything else, from food to clothing to saving for that boat. Make a list of all your monthly spending; remember to include things like entertainment, daily coffee shop trips, gifts for others, and savings for vacations or holidays. For every category possible (food or entertainment, for example), withdraw the cash for your monthly allotment. Put it in an envelope and write the total on the outside. Whenever you buy something, use the money and note it on the envelope. When the money’s gone for that month, you’ll have no more to spend in that category. If there’s some left over at the end of the month, you can carry it over or put it in another envelope or savings account.
Unexpected income should be divided any way you like between envelopes: bulking up savings accounts, paying off debts, or padding a monthly expense budget that feels tight. The thing not to do is to spend windfalls outside the budget.
Money for discretionary categories should be kept in your checking account money so they’re easier to pay with a check or debit to your account (such as a monthly charitable pledge). You’ll also want to transfer to your savings account any savings projects, treating and recording them the same way you do your must-pay savings.
If you stick to the envelope system, you won’t need credit cards. You’ll be living on what you earn. And that’s not only a great feeling, it’s a recipe for financial success and security.
We hope you find this month’s issue educational and helpful.