Yesterday I started my series on budgeting. This is a big thing for me! Everyone who did yesterdays exercise, please pull out your pen and paper. If you didn’t read yesterday’s blog, please do. If you already have a budget and are looking at implementing the envelope system, welcome.
Like I said yesterday, cash is king in your world right now, and because cash is king, you need a good way to track it. This is money you have left over after covering all of your bills… if you have that.
I will use my finances for the example. Yesterday I laid out our monthly expenses, which total $3266. My loans are an additional $1200 and our gas and food for the month is $900. This totals $5366. My income (if I were working and picking up one extra shift) is $5200 and Tony’s is about $640. (we took a pay cut when he quit his first job and then another when we moved). Our total income $5840. Yay, we make more than we have in bills! So, what is left? About $500.
If, like us, you have more income than you do bills, first and foremost, put aside $1000 for an emergency fund. This is one of Dave Ramsey’s baby steps. I do believe it is his first baby step. With our income, this took two months to accomplish. Last year we had to break into our emergency fund because one of our cars took a pooper. We were able to replenish quickly but we were happy we had the fund. So far, with me being off work and Tony getting so few hours, we haven’t had to break into that, and hopefully we don’t, but it is there. Knock this baby step out as fast as you can!
On to the envelopes. Envelopes are things you would like to buy, or put money aside for, that fall into expenses you don’t have all the time. The exception to this is gas and groceries. You need both of those, but we tend to over spend in those categories, which is why you are only using cash for them. Our envelopes, in addition to gas and groceries, are hobbies, entertainment, fun money, clothing money, travel, medical, car repair, house items, pet, and miscellaneous. We made this list when Tony was making a lot more, so we had a lot more disposable income. Fortunately, when I start working again I will have the ability to pick up a lot of extra shifts, so I can make up for lost time and income.
Ninety percent of the time I treat these just like I do all my other monthly bills. The exception has been this stretch of lack of income. That means each envelope gets its cut, regardless of my debt status. I know, I can hear the screeching too. How do you plan on getting out of debt faster like this?!?!?! Simple answer, I don’t. The amount of my debt is a long haul affair and there is still life to be lived.
I have read countless blogs where people have given up just about everything in their quest to be debt free. I salute those people! If you can whittle it down to just a few categories and use your emergency fund for emergency purchases (my scrubs got a huge hole in them type purposes) then great! You do that. I won’t. Does this mean I will pay more in the end? Yup. But there is an upside. I can go to dinner and a movie with my husband and know my bills are still covered and I am making progress towards being debt free. I can fly home to be with my best friend when she walks down the aisle and know that it’s okay, we saved for this. I also have a lot of FAT in my budget that I can trim when time gets tight. Tada!
So how do we handle what goes into our envelopes and when. Like most of our bills, we are working towards them all getting paid on the 1st of the month. It allows us time to rebuild our depleted stock, and hopefully a little extra, so we come out ahead the following month. The eventual plan is to live on LAST months income. So many plans!
I get paid every two weeks and Tony gets paid every week. Currently we stagger our payments into our envelopes according to when our bills are due and how much we have in our account. This allows us to control which envelopes get money and which don’t as well. Important ones to us to get money every month are pets, medical, car repair, and house items. The rest we can forego if we needed to.
Now, this part is really important. All of our envelopes have a cap. This includes our gas and groceries envelope. Remember how I said I put $150 away a week for food? Our cap for our groceries is $600. If we were to not buy food for 4 weeks, we would cap out our groceries envelope. Highly unlikely, but follow me. Say we do eat in those four weeks, but I am thrifty and only spend $75 each week. By the end I will have $300 left in my envelope. Pretty nice. Then I do it again. Now I have $600 in my envelope! Yay! Now I don’t add any money to that envelope the next week. WRONG. I add the $150 that week, and use it. If I still only spend $75, the additional $75 left over will be put into another envelope. This is how I max out my envelopes, which is really important for saving money. Eventually, if I am frugal enough, all of our envelopes would be maxed out, we would be set, and all the extra envelope money can go to pay off debt.
The biggest question I get is why? Why do you not focus paying down all your debt? Because I like to shop and eat out. That’s why.
So, here is the basic overview of our envelope system and how it works.
- Pick categories you would like to put money into, with gas and groceries being non-negotiable. Be specific on what those categories are going to be used for, too. No willy-nilly I will use my entertainment for movies this week and my household items for DVDs next week.
- Decide how to divide you remaining income into these categories. Which ones are most important. Medical, in case of emergencies? Travel, when you life far away from your family? Car repair because you have a beater?
- Set caps for your envelopes. Be reasonable. If you have a beater, set your cap at $10000. Doesn’t matter when your car dies, you will have either a nice down payment for a new car or totally buy a better used car.
- When an envelope reaches that cap, add the next week or months money to it. At the end of the week or month, move the excess to another envelope.
- I would highly suggest you hide this container of money somewhere. I used regular envelopes and left them in the envelope box. Thieves don’t usually look there for extra cash.
This is probably the biggest rule to this whole game. You cannot, I repeat CANNOT, dip into another envelope if one zeroes. NO EXCEPTIONS. Robbing from Paul to pay Peter gets you nowhere, and you are already there. Use your system for three months, then reevaluated. Do you need more funds in one area and not as much in another? Are you putting too much into your envelopes when it would be better to go to debt, especially if you aren’t using the money? If your system is working after three months, great, if not, revamp, but under no circumstances do you take money from one envelope to cover another.
Alrighty-roo, that’s my take on the envelope system. Some resources for you.
This lovely lady has her take on budgeting and the envelope system and even has a free printable template for you to make your own snazzy envelopes.
This thrifty mama uses an accordion file folder for her system and has a little bit of info on Dave Ramsey.
Tomorrow I am going to chat about one of the biggest money sinks we have… Groceries! If you want to make a serious dent in your debt without starving to death, well my friend, meal planning is in your future!