An easy and fairly painless way to help solve this budgeting problem is by setting up a cash envelope system. It seems like it would be hard to go to an all cash budget, but with a little discipline anyone can do it. You'll be amazed at how easy it becomes to pay the bills and save a little money.
There are commercial systems that are available, but before you go out and spend money on one, try this method first.
Why I decided to use the money envelope system to budget
When I graduated from college I got a job and moved to New York City. I earned a small salary and lived in a tiny basement apartment while barely scraping by. I quickly realized that money went out the door a lot faster once I had to pay my own rent and other expenses. After about 4 months of a dwindling bank account and a rising credit card balance, I vowed to do something about it.
I decided to go to an all cash budget using a money envelope system. My reasoning was that if I did not have the cash on hand, then I could not spend it. I took my credit card out of my wallet and stashed it away, keeping it only in case of an emergency.
The next few months were pretty tough and I declined a lot of invitations to go out, but I noticed that at the end of every month I had paid all of my bills on time, and I was starting to build up my savings again. This envelope budgeting system worked well for me and I used it the rest of the time I lived in New York.
How to use the money envelope system
Once you have decided to try this method, it's easy to get started.
Determine your family's monthly income and expenses and write them down. Start with your fixed expenses like rent and car loans. For expenses like electric, take a look at past bills and do an average. Your income minus your expenses should equal zero once you've calculated all of the numbers. To get your budget to balance, you will probably discover that you'll have to decrease some of the variable expenses.Assuming you get paid on a bi-weekly basis (every 2 weeks) divide the expenses in half. This is the amount of cash that you will put in your envelope every time you get paid. For example, if your car loan is $250 a month, $125 from every paycheck goes into the car loan envelope.Since bills are not all paid at the same time over the course of one month, it may take a couple of months to get going. Once caught up, everything should work out.Every household is different and it will take some time to review your income and expenses and come up with a workable budget. The table that follows represents a basic sample budget which can be adjusted to meet everyone's needs.Some important tips when using the money envelope system for budgetingDiscipline is the key - If you don't have the cash, don't buy the item. Don't take money from one envelope and put it in another.Make hard decisions - If your budget is not balancing, you'll need to make hard decisions. Skip the fancy coffee shop drink or skip the weekly night out once in a while.Save leftover funds in the envelopes - There will be times when you'll have some money left over once you have paid the bill. Roll it over to the next month or tuck it away in savings. Another idea is to have an envelope for the extra funds so that if you ever find yourself short on a bill you can take it from this envelope.Involve the entire family - Let your family know what you are planning on doing. Get them involved in the budgeting process. It will help everyone adjust to the change more easily.Keep a credit card - While the goal of this system is to save money and help your family adhere to a budget, there are times when emergencies arise. Keep a credit card tucked away somewhere in your house for these situations.You don't have to use envelopes - Get creative and use cans or jars. There is a popular financial television presenter from Canada who visits people in serious debt and she uses this type of system with jars.
Keep in mind that this system is not for everyone. Many families have multiple accounts where funds are transferred in and out and bills are paid online, but if you have a fairly simple budget, then give this method a try. It takes time to get used to it, but it is an effective budgeting tool for all families.
Disclaimer: I am not a financial advisor. I used this method and had success, but everyone has different financial situations and results.
