The Envelope Method: Simply put, this method uses a cash-based approach to ensure you don't overspend. (We were using mint.com, which tracks spending in categories really well and will alert you if you're going over by automatically connecting with your credit card companies and banks. This worked well for us for a year or two, but our current bank doesn't play well with mint's software, so we had to find a different way of accounting for spending.) You take one envelope for each category in your budget and withdraw the allotted amount of cash for that category on a schedule. That's all you have for that category until your next withdraw date. (We withdraw twice a month. We're paid twice a month and I don't want to carry a full month's worth of cash. I withdraw one day after the first pay day of the month so there's time for the check to be solidly in our account and 15 days later, so my cash periods are evenly spaced.)
I didn't think the envelope method would work for us at first because we pay most of our bills online. This is a time- and sanity-saver because I can sign up for alerts and reminders, the payments go through quickly, I get email receipts, and my track record with the whole getting-it-in-the-mailbox thing is not great. But, when drawing up our budget, I realized that most of those bills are pretty similar, if not exactly the same from month to month. Mr. Ramsey has some forms to help you get started, but I realized that our needs are so different from those templates that I created my own. I have three categories: Predictable (for those amounts that don't change, like our church offerings, car insurance, student loan payments, etc.), Variable (for bills that fluctuate, like water, power, gas, etc.), and Till it's gone (TIG) (food, gas, clothes, etc.). We pay the first two categories online or by check, and the last section is my true envelope-ly budgeted area.
Church/charity: 10-15% (Predictable) We spend 10% on church offerings. This works out to different amounts per week over four weeks or five weeks. I write checks and fill the church envelopes at the beginning of the month so I don't have to remember whether we're in a 4-week or 5-week month on Sunday mornings.
Utilities: 5-10% (Variable) This one is a thorn in my side. You can't really control the percentage of your income this will take up; it is what it is. Yes, you can do things to conserve, but your house HAS to be heated in winter and you NEED those fans or A/C in the summer. We average out what we spend per year and hope it will all come out in the wash. We budget 8% of our income for this category, which includes water (and trash pickup), power, gas, and cell phones. Our church pays for our landline and internet since they're used mostly for church business, but most people's would fall in this category too.
Transportation: 10-15% (Predictable & TIG [Till It's Gone]) Our car insurance (and car payments, if applicable) are predictable. Gas and service are TIG. We have budgeted 10%, with cash per pay period for gas and service and an online payment per month for insurance. In the last month we've switched car insurance carriers, so now it's less, but I haven't redone the budget yet to reflect that. The savings is currently just being rolled back into our checking account.
Health and Medical: 5-10% (TIG, though we don't take cash out for this category, since those bills are paid by check.) We budget 5%. This covers those lingering medical bills, contacts, etc. It's kind of weird right now, as we've met our deductible and we're waiting on reimbursement from insurance for out-of-network eye exams. But this is how we can tell if I can afford to go to the chiropractor again this month, or if I need to wait to get a new retainer.
Recreation: 5-10% (TIG) We do 5%. This is kind of our slush section. We've used it to pay for camping and we're saving now to fix up our bikes, get a trailer for the baby next summer, and renew our community center membership this fall. It's also for movies, dinners out, etc. Technically dinners out should be "Food," but if that budget gets tight or I feel I can't justify a special edible item, it comes from the Rec envelope.
Personal 5-10%, Clothing 2-7%, and Housing 25-35%: (TIG) We wrap these all into one since we live in a parsonage (no rent or mortgage) and we don't buy clothes often. Our budget is 18%. This pays for pretty much every incidental item that's not food. Dave's explanation of each section is good; go read it. :) Right now the %age that should be going to housing is paying off debt. In the next few months that should be gone, and the money will go toward amping up our savings to someday buy a house.
Food: 5-15% (TIG) We budget 10%. We are also on WIC, which has been very helpful in this category as well as Health, since it's free to stop by for breastfeeding or weird rash help from their nurses. The food we get from WIC is stuff I buy anyway (except the canned salmon. Eww.) and it saves us an average of $20 per week on food.
Savings: 5-10% (Predictable) We officially save 5% per month. Again, we are currently working mostly on debt reduction so that number will go up substantially in the next few months. And the first month's savings amount went to start an account for the baby. Still can't decide if that was the best move, since we don't have a technical savings account ourselves yet.
Debt reduction: 5-10% (Predictable) We budget 13% since we don't have housing expenses. Once the credit cards are paid off, we plan to budget 5% toward student loans and put the other 8% into savings.
Taxes: Dave doesn't have a percentage for this since most people pay taxes automatically. My husband is self-employed for tax purposes, however, so we have to make quarterly payments. It's 16% of our income. We leave it in checking, because that's where it will come from on Tax Day.
The Wrenches: Of course, there are problems with this system. My husband, who is a pastor, will buy something for church and sometimes forget to tell me when that money is spent or when he's reimbursed. (We're looking in to having church get a credit card so those expenses don't have to come near our family budget.) We'll sell some books or stuff online and that's unexpected income. The car will need work or our water bill will be high for some reason. Hubby gets paid outside his regular salary for weddings and funerals. And then there are the budgetary nightmares that are childbirth and Christmas. Crazy unexpected expenses, crazy unexpected gifts. And the tax return. And cash that's leftover in the envelopes on withdrawl days. Dave recommends a $1000 emergency fund for those expenses. We're still working on that. When we get unexpected income or gifts, we will usually put a small portion toward a treat or special project we're saving for (minivan, what?) and put the rest into the bank.
We've also started backup envelopes for the leftovers. We often have money to spare in the gas section, but we're planning a trip to Wisconsin next summer that will cost an estimated $350 in gas. We write our goals on the Extras envelopes in pencil, along with what we estimate each item will cost, then we continue to save for those things. Extra food money will go toward Gingerpalooza 2013 and holiday meals. Our Personal cash is being saved for an imminent car seat purchase, Christmas gifts, and a grill. The car seat could come out of the regular personal budget or even the Emergency or Savings funds because it's something we simply have to have, but since we've got a little time before that purchase needs to happen, we're choosing to save for it instead.
A few opinions on credit cards: As freeing as the iconic snipping-of-the-plastic may be, we find credit cards to be a mixed blessing but overall very useful. If used wisely and paid off in a timely and complete manner, they are essential to building credit and useful for tracking expenses with little effort. We use Capital One and they have excellent rewards; you can easily apply rewards directly to your balance. We've saved over $200 on payments simply through their rewards program. I have not been as impressed by Citi's incentives; they're not as useful to me since we don't stay at hotels or shop at their rewards retailers. We also find that until we get our emergency fund up to scratch, our credit cards are a safety net. We only use them for online purchases right now, and those are few and far between. They are actually preferable for online transactions, though, because if you're scammed or you need to make a return, you haven't actually paid for whatever it is yet. If you paid with a bank card, that money comes directly out of your account and it's much harder to get it back for any reason. Credit card companies are set up to do that kind of thing and are much more likely to sort things out for you because it's their money in limbo if you haven't paid off that purchase yet. So, in short, we are not using our credit cards often but we do intend to keep them active.
All in all, this budgetary makeover has been a rewarding experience, financially as well as emotionally since we now feel we have a better handle on our cash flow. We hope that if you're in a sticky spot in the monetary department, this information will help you regain your footing. :)
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