101 -- Creating a Budget Using the Envelope Method
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Setting up a budget. Sounds like it should be a piece of cake, right? You take what you make, take the bills you have to pay, pay the bills each month and what you have left over, you need to decide how to spend, right?
Basically that is the bare bones way to do it. Chances are, if this is your plan you won't be able to make a workable budget and stick with it.
Creating a budget that will work for your family will take a minimum of at least one month, preferably two. The important word here is work. You want to create a budget that is workable for you and flexible enough to suit the needs of your family. If it isn't, you are wasting your time.
Purchase a spiral notebook, the kind you used to use in school. In it take the first page and use this to write down all income. Each pay day on that page (title it income write down the date, amount paid, and where you put the money (pocket, checking account, savings account, etc.).
On the next and subsequent pages write down each and every expenditure you have. This will include all of your bills and any purchase you make, no matter how small. Even if you run into the store to grab a candy bar you need to record it in this ledger. Do this for 2 months (or one if you are pressed for time). Categorize these purchases in a manner that suits you and your spending plan. For example entertainment, education, personal, etc.
Get out the note book you've been recording your expenses in, calculator, a new notebook, and a box of envelopes, and a good pen. You may need to break out the heavy artillery and have some chocolate on hand for this task. Budgeting is hard work.
Now total up your monthly income. Leave out things like garage sales or anything else that you can't count on each and every single month. If your monthly income changes from month to month, take your yearly income and divide by 12 to come up with an average. This can be adjusted after time if it's not working out.
Now take your fixed expenses each month and write them on a separate page, titled "fixed expenses." These expenses would be your mortgage, car payments, utilities, insurance, credit card expenses (if you only pay the minimum), or other monthly bills where the amount stays the same or relatively the same.
Now we will take monthly expenses that vary, such as gas for your car, upkeep on the car, clothing, gifts, groceries, expenses that you have each month where the amounts may not always be the same.
Now on another page list expenses that occur during the year, but at larger intervals such as tune up's, tuition, car insurance, and other similar expenses.
Total up all expenses and divide by 2 or 4, depending on how often you get paid during each month. This will be the amount you will need to save pay period from each check to meet the goal (paying the bill).
Take the total expenses and deduct from the total income. If your expenses exceed your income, you will need to sit down and figure out how to reduce the expenses you have, or increase your income.
Time to pull out the box of envelopes. Take them out and on the front of each envelope list your expenses. One per envelope. I would start with the largest and work my way down to the smallest. You can add whatever pertinent information you would like to the front of the envelope such as address, amount due, date due, date to mail, etc. Write on there "amount needed to save each pay period to reach full payment," and then write the amount after it (we'll do this step in just a moment).
Go back to the first page of your notebook where you listed your income for the past one or two months. Take the amount listed for each expense on the front of the envelope, for example your mortgage payment/rent, divide the payment amount by how many pay periods there are in the month. That is how much you will need to save from each pay check. You can save it in the envelope or in your checking account. I prefer the envelope method for most expenses. I then deposit the money into my checking account the day I write the check to pay the bill. I'm less apt to spend it if it's not in the bank.
As far as grocery expenses, I just take my list, my envelope, my coupons, and my calculator and once that money is gone my shopping is done for the month. When you do it this way you learn to save as much as possible.
Savings is an important step in the budgeting process. It should be the first "bill" you pay each pay period. Start small if you are new to saving. A savings of $5 - 10 each pay period may not seem like much, but it adds up quicker than you would think. An amount of that size you won't even miss. Adding overtime, bonuses, gifts, and extra income to your savings will make it grow faster. The ultimate goal should be to have 3 months worth of bill payments in your savings account and then you can start working on other goals such as a vacation, new furniture, etc.
At the end of the month, if you have been frugal and watching your spending, you may have extra money left over in your envelopes. This can be put into savings, spent on a fun activity for your family as a reward, or carried over into the next month. You'll have to find the system that works best for your family situation.
One thing to keep foremost in your mind when setting up your family's budget is to make it a workable budget for you. Don't make it to strict that you are setting yourself up to fail. If you slip and it doesn't work out, try again next month. Don't give up! All new things take time and patience to learn.
Copyright 2001 by Bobbie Jean Knealing