Photo courtesy of Bill in Ash Vegas

For those struggling to get control of their finances, one of the often prescribed measures is to create an envelope system and live on a cash-only basis.  This worked well for us when we initially made our financial turnaround.  We have since graduated to a debit card, but still use envelopes for a couple spending categories that we tend to overrun each month if not kept in check.

One of the knocks of an envelope system is that it is not portable, or that it is difficult to manage when on the go.  Often times I needed to stop by the store on the way home from work, but the “Grocery” envelope was sitting on our desk at home, or still in my wife’s purse from our last shopping trip.  Another complaint is that takes too much to manage.  For instance, a trip to Wal-mart for groceries, shampoo and a new basketball for the kids may require the use of three envelopes representing three separate spending categories.  Below are a few strategies that worked for us when we had to take our envelope budget system on the road.

• When funding your envelopes, ask for small bills.  This step may require you to go inside the bank to withdraw money from checking, but it is worth the hassle you’ll save later when managing your envelope system. Smaller bills make it easier to move money around envelopes in a pinch, or to settle up from a shopping trip that crossed multiple spending categories.  If the only thing in your envelope is twenty-dollar bills it makes it difficult to incrementally shift things around.

• Separate shopping carts.  One of the biggest conflicts we had within our envelope system was “Food” and “Household,” because the two categories often overlapped, and because we often picked up items from both lists during the same shopping trip.  When my wife and I shop together we each grab a shopping cart and only place food in one or our carts.  All other non-food household items go in my cart.  If shopping alone you can get a shopping cart, and place one of those hand-held shopping baskets inside the cart to separate items.  I toss things like shampoo, razor cartridges, over-the-counter medicines, etc. in the hand-held basket, while freeing up the shopping cart for food items.

• Review receipts when you get home.  Depending on the crowd at the checkout line we may run each shopping cart through as a separate transaction.  However, if there is a long line, or we’ve selected a cranky grocery clerk, we’ll often ask the cashier to subtotal the items on the receipt for us after running through each spending category.  We pay for the entire balance by grabbing enough cash from one or all of the envelopes and settle up when we get home.

• Leave grocery envelope in your car’s glove box.  After the initial grocery shopping trip of the month (or pay period), consider stashing your “Grocery” envelope in your car’s glove box.  For added security, you may want to lock the glove box, unless you need access to something while driving.  This way, if you are out and about and see a sign for a great deal on boneless chicken breasts you don’t have to go all the way home  just to get your food envelope.

• Create a sub-envelope, or two.  Another way to take the envelope system on the road is to save those envelopes you get back from the teller when making cash withdrawals and use them to fund smaller envelopes that stay in your wallet or purse.  For a while, my wife and I did this with our “Household” budget envelope.  Our household budget was $150 a pay period and included things like diapers, baby supplies, cleaning supplies, etc.  My wife kept $50 of the envelope money in her wallet inside a teller envelope labeled “Household.”  If she saw a great deal on diapers somewhere she could pick them up without having to return home, or carry the entire envelope system with her.  We simply replenished her sub-envelope from the one kept at home.  Note, this method does take some discipline–just because you have money in your wallet doesn’t mean you have to spend it!

The envelope system is a great budgeting tool, particularly if you are new to budgeting, or are having trouble sticking to a budget, as we were.  The visual reinforcement of peering into a nearly-empty “Entertainment” envelope when considering a day at the movies forces you to find a frugal alternative.  As you get more disciplined it might make sense to move to a debit card for added convenience, or even run everything through a credit card and pay it off each month (this takes maximum discipline and I do not recommend this method for non-essential spending categories).  However, most people who give the envelope system a try find it to be a great budgeting tool.  By implelementing the ideas above you can improve the system even more by improving its portability.

For additional portable envelope budget system ideas, visit NeoBudget.com.

This is a guest post from Ron at The Wisdom Journal. He blogs about personal finance, business ideas, and life in general. You can subscribe to his feed here.

photo credit: kellypuffs Going over to Grandma’s house and knowing she had just baked some fresh, homemade chocolate chip cookies is one of the the highlights of childhood. The tantalizing aroma of sweetness and chocolate wafting through the screened door always dominated my mind as I walked up those back porch steps and I couldn’t think of anything else. Couple those warm and gooey cookies with a glass of icy cold milk and I just knew what heaven was going to be like. Even if they weren’t freshly baked, I knew where the cookie jar was, and I knew she would set me down at the kitchen table and watch me devour as many as I could…as quickly as I could. I always knew that the cookies were there until I (or my little brother) ate them, but when the cookie jar was empty, it was empty. There were no credit advances. The beauty of Grandma’s cookie jar was that not only did it satisfy my sweet-tooth, but it taught this simple and effective approach to managing money: The cookie jar was not a bottomless pit. The outgo could NEVER surpass the income. There was no such thing as a cookie credit card. There was no “cookie debt.” Today, we can use the cookie jar as a method of budgeting. Some people use envelopes, but the principle is the same. What goes in is the only thing that comes out! The amount spent can never exceed the amount deposited. To make this system work, you need two elements:

1. A plan for spending (a budget)
2. A system of self-control

The problem in our families today, in our government, and in too many businesses is that we have lost sight of these basic elements — planning and self-control. We believe we are so sophisticated that the basic principles of budgeting and self-control are no longer necessary or even relevant in our daily lives. Deficit spending, at every level, has eroded the plan because financing is always available to go beyond what we planned to spend. Problems only surface when all sources of credit have dried up and a life-style of cookie consumption has been established that’s far beyond our ability to repay.

Credit allows us to live in the short term, as if the cookie jar were bottomless.

When credit is gone, the only available options are so devastating that many people face personal bankruptcy, severely strained marriages, wrecked retirements, and ruined financial lives. Assets must be liquidated, children removed from private schools, houses and cars must be sold, and life-styles must undergo dramatic and difficult adjustments.

What’s the solution? Remember to follow the basics of Grandma’s cookie jar. Never allow your outgo to exceed your income, and plan your cookie eating so that you can stretch the enjoyment over a longer period.

The world is bent on telling you that you can have everything NOW. It’s your job to resist through proper long range planning and a steady focus on your long term plans for financial independence.

The development of our household budget has been a wild ride. After we first married, some ten years ago, we rarely sat down to discuss finances, detail a monthly budget, or even discuss longer term plans such as retirement goals, etc. Over time I took on the role of handling the finances in our relationship and made a few half-hearted attempts at a budget on a most infrequent basis. It wasn’t until I finally had a financial wake-up call that I realized budgeting, and better communication about money, were the keys to our financial success. To this day, I have a difficult time setting a budget amount at the beginning of the month and sticking to it.

When Budgeting, Think in Shorter Terms

One of the ways I’ve found success in budgeting is to think in shorter terms. Instead of trying to plan for an entire month’s worth of income and expenses, I’ll just plan out the next two weeks (which works well since I’m paid biweekly). Personally, we find it easier to anticipate upcoming expenses over the next couple weeks than for the entire month. But even a two-week plan has pitfalls. Things always tend to sneak up on us that we forgot to account for when setting the budget. Kids’ yearbooks, medical expenses, or a trip to the vet can blow your budget out of the water. For this reason I’ve started thinking about my income and expenses on a daily basis.

The Daily Cash Flow Battle

I don’t literally mean I lay out a budget every single day in a formal manner. I mean that I break down my incidental, or miscellaneous, expenses budget for the entire month down into a daily amount. For instance, if I set aside $360 in June for incidental spending (eating out, clothes, gifts, entertainment, etc.) then my daily incidentals budget is $12. That means I can spend an average of $12 a day on these miscellaneous budget categories and not break my budget. I keep this figure tucked away in my memory bank and while out and about during the day keep sort of a running total in my head. There was the $3.00 breakfast sandwich on the way into work; $1.00 for the drink out of the machine; $5.00 for a coworker’s kid to go to band camp. I’ve already spent $9.00 of my $12.00 budget for daily incidentals. That means if I want to stop by Target and pickup that new CD that came out it will have to wait until another day.

One Bite at a Time

This plan reminds me a bit of that saying, “The best way to eat an elephant is one bite at a time.” By breaking down an entire month’s worth of budgeted expenditures into a daily limit we are forcing ourselves to keep an inventory of our expenses as we go about our lives. Not much room in this plan for a $40.00 pair of jeans you happened to see in the window on the walk to work. If you continue to win the daily battles when it comes to daily cashflow, ultimately you will win the war against debt and overspending.

photo by IntangibleArts

Debit cards have been sold as a safer alternative to credit cards, but when it comes to budgeting they can be just as dangerous. That’s because debit cards offer the same convenience as credit cards and people don’t feel the emotional twinge of money actually leaving their wallets. For this reason, my family recently went to a cash-only budgeting system using envelopes.

Listed below are the steps we took to implement our envelope budgeting system:

Step 1: Determine which categories to include in your budget. Not everything in your household budget can fit into an envelope, literally. Things like utilities, subscriptions, and other recurring monthly bills are typically paid online or via bank draft. The real spending categories we are interested in are discretionary spending categories. For our family these are food, household products, gifts, entertainment, and clothing. In the beginning we also included gasoline, but the pay-at-the-pump feature is just too convenient to pass up on a cold, rainy day, so we still use our debit card at the pump. Who wants to carry kids into a convenience store to pay for $30 worth of gas in cash?

Step 2: Use past spending to establish initial budget amount. Using Microsoft Excel and my online banking system’s export feature, I downloaded our last 90 days of transaction history. I identified which transactions fit into each of the five categories listed above. This is not an exact science as $45.90 spent at Walmart won’t help you remember the itemized list of transactions, and to which category they belong. If you still have some receipts, great. If not, just estimate your typical breakdown on a trip to Walmart. For us a $45 transaction at Walmart might look like: $20 on groceries, $10 on clothing, $15 on household products. Using your best estimate come up with an average monthly expenditure for each category.

Step 3: Create an envelope for each spending category. Write the name of the category and the monthly amount budgeted on the outside of the envelope. You may not have enough float in your checking account to withdraw all the cash to fill all the envelopes with your first paycheck each month. That’s fine, just break down the monthly budget amount by the number of times you are paid in a month. In our family the “Food” envelope gets $200 every two weeks (I am paid biweekly), for a $400 monthly grocery budget.

Step 4: When the envelope is empty, stop spending. The only way this budgeting system will work is if you make a pact up front not to move money between envelopes, and to not spend additional money in a category when the envelope runs dry. If the “Food” envelope is empty three days before payday then you better start searching the freezer for those two-year old corn dogs. If your “Clothing” envelope only has two dollars in it you have to pass up those “fabulous shoes” on sale at the mall.

Step 5: Revise and repeat. No budget is going to be perfect from month-to-month, and envelope budgeting systems are certainly no exception. At the end of the month look back at your spending and determine where you could have allocated a little more, and where you assigned too much of your paycheck. We routinely have more in our clothing envelope than planned, but we simply leave the money in there because clothing purchases tend to come in waves when the weather changes, or as the kids outgrow their current wardrobe. We empty the other envelopes at the end of the month to make an extra contribution to our debt snowball. This gives us a little extra incentive to try to stay under budget in each category.

After a trip to the dentist this week we discovered my daughter’s overbite is causing damage to the backside of her upper, permanent teeth and the schedule for her receiving braces should be moved up. We had already consulted an orthodontist, but we all agreed she could wait until she was a little older. Based on what our dentist advised, this is no longer an option. Obviously, the news doesn’t help my efforts to get out of debt and build a healthy emergency fund. Over the last day or two I’ve had time to digest the news and devise a plan of attack.

The best way to eat an elephant is one bite at a time. At least that’s what all the personal productivity gurus tell us, right? The idea does have some merit, particularly in the area of personal finance. For instance, in the days immediately following the last-minute Christmas shopping hangover my wife and I agreed next year we would plan for Christmas expenditures instead of trying to cash flow them out of each paycheck from October to Christmas Eve. We opened an online savings account and committed $25 a paycheck (biweekly) be diverted to that dedicated “Christmas Club” account. We plan to take the same approach to braces, only the dollar amounts will be significantly higher and I’ll have to come up with a more foreboding name than “Club” to attach to the ledger identification. This was the option we settled on, but there other strategies we strongly considered.

Our first thought was to fund braces using our flexible spending account at my employer. This might still be an option, but I had three reservations. First, I would need to investigate the IRS regulations to determine if orthodontics were covered as an FSA-eligible expenditure. Second, our FSA is tied to a debit card and all charges must be run through that system. I planned to do some negotiating with the orthodontist using cold hard cash. Thirty Benjamin Franklins laying across the table look a lot better than a Mastercard debit card when trying to broker a discount. And finally, agreeing to have $150 deducted from each of my twenty-six paychecks would cause a significant hit to the monthly budget. Of course, one could make the argument that I’ll have to set up the deductions to some sort of savings vehicle anyway, so why not get the tax deduction associated with creating a pre-tax flexible spending account. Good point.

We could finance the amount directly from the orthodontist. This discussion didn’t get very far because my wife and I are committed to taking on no new debts, even for braces. Putting the braces on a credit card, taking out a loan, or using the orthodontists in-house financing just did not appeal to us.

In the end it appears saving biweekly amounts in our online savings account fits best with our current financial strategies (keep it simple, no new debt!). Like other decisions we’ve made with finances, it may not make the most sense mathematically, but it makes the most sense personally. That’s why they call it personal finance.

I’m currently reading Stay Mad for Life, the latest offering from CNBC and TheStreet.com money manager, Jim Cramer. By the way, I personally think this is Cramer’s best work as it focuses on all areas of personal finance, not just stock picking. In the early chapters, Cramer discusses a unique way of budgeting that carries monthly expenses out to yearly outlays. It got me to thinking. My wife and I are big soft drink drinkers. Besides them not being healthy, I wondered in what other ways these things were affecting our lives.

In a given week we probably go through 2 twelve-packs of Coca Cola (or Diet Coke, depending on how good we are being, or not being). Our local grocery store generally offers a 3/$10 deal making these close to $3.50 each with sales tax. That comes out to $7.00 a week on soft drinks. Convert that to a 52-week, annualized expense and it comes out to about $360 a year, nearly a dollar a day!

Over the next couple days my wife and I plan to take a look at our budget and annualize all our expenses to determine what’s costing us the most over the course of a year (can you imagine what the cable bill looks like…yikes!).

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