More often than not, Americans will spend more money than they make. The country as a whole actually has a negative savings rate. People are borrowing more money than ever before to finance lifestyles they cannot afford. A major cause of this impending financial disaster is that most Americans don’t take the time to manage their finances, plan for the future, and perhaps most importantly, write a simple monthly budget. Fortunately there’s a way to budget that doesn’t require a lot of advanced mathematical skills or accounting knowledge. The only thing you need to do get started is find a package of 5 or 10 envelopes, grab a piece of paper, and a pen.
It’s called the envelope system, and it works on a completely cash basis. The general idea is that you designate a certain amount of money each month for certain categories, such as groceries and gasoline, and put the amount of money you designate for each category in an envelope. When you want to spend some money from one of your categories, you take the money out, spend it, put the change in, and go on with life. When the envelope’s empty for the month, you’re done spending in that category. This will prevent you from going over budget. The trick is that you can’t just start throwing stuff on a credit card or a debit card once you’ve used all of the money you’ve budgeted for a certain category each month. That won’t stop the behavior of overspending.
To get started with the envelope budgeting system, grab a piece of paper. Write the words, “rent/mortgage, groceries, gasoline, dining out, entertainment, savings, and retirement on the top.” These will be the first five categories that you budget. You’ll want to add other categories that you spend money on regularly too, such as clothing, child care, books, and the like. These additional categories won’t be the same for everyone, but those should give you a general idea of the types of categories that you should have.
Next write down how much money your family brings home every month. Let’s say you make $50,000 a year, so you’d write down about $3500 for the month. Now put a dollar amount for the month in each category, and make adjustments until you’ve spend all of the money that you’re going to earn each month. Remember to include giving, saving, and investing along with your normal monthly bills and expenses. Congratulations! You’ve just written your first monthly budget!
When the beginning of the month comes around and you get paid, take cash out of the bank for each category that you can spend cash in. Write checks for the other bills ahead of time and put them into envelopes of their own. When it’s time to mail them out or hand them to the appropriate person, you simply hand them the check, it’s already been accounted for in your checkbook so it’s as if the money were already spent. This will make you must less likely to be tempted to spend it on other things. You should also put away the money you want to for saving and investments right when the money comes in as well; otherwise you’re likely to spend it.
Remember, in order to make the envelope system work, you absolutely have to stop spending when the money runs out. You can make adjustments in your budget by changing your sheet of paper and moving money from one envelope to the other, but don’t spend any extra money, that’ll just put you in the same place as everyone else in this country who’s having major financial problems.
The envelope budgeting system is the single easiest method of budgeting. It’ll be hard for the first couple of months because you won’t be entirely aware as to how much needs to go in each category right away, but after a few months, you’ll get it down and will have gained a new level of financial responsibility.