February 2011
By Stacey Abler
It’s not yet pay day but there’s nothing in the house to eat and the baby needs diapers. Sometimes it’s hard to tell just where the money goes during the month unless you are using a tried and true system. Developing an envelope budget can help control your budget and make sure your money lasts until the next paycheck.
Even if you aren’t living paycheck to paycheck, it can still be beneficial to set up a budgeting system. Without tracking, many people spend much more than they realize and have little to show for it at the end of the month. Let’s delve into what the envelope budget is and how it can help you as a military family.
The first step is to figure out how much you are currently spending every month. For one month, keep a notebook with and write down every single time you spend any money. This may be paying a bill or stopping for a soda at the store. All amounts spent should be documented. To make it even easier, assign one page for each category in your notebook such as household expenses, entertainment, gas, groceries, etc.
When you reach month end, tally up all expenses by category. But prepare to be surprised. This was a real eye opener when my family did this exercise and we realized how much we were spending, or I should say wasting, on frivolous and spur of the moment expenses.
Now that you have an idea of your expenses, it’s time to look at your income. Gather up your military member’s LES and any other sources of income. Add the total of all checks that you can count on receiving monthly and place that total at the top of a clean sheet of paper. Now, subtract what you spent this month. How’s it look? Are you surprised at the outcome?
Don’t worry. Most people are. If you’re in the negative, it’s time to look at where you can trim expenses. Most can start with discretionary spending items such as eating out, entertainment, your morning latte and clothing. If that’s not enough to put you in the green, move on to other things that are nice to have but not necessary such as cable and high speed internet service.
Even if you are in the positive, you can still scrutinize your expenses. Perhaps you could cut out one restaurant meal a week and start a college fund for your child? Or put a little away each month to save up for vacation instead of adding it to your credit card this year. Adjust your amounts as needed to meet your financial goals.
Now, we need to identify fixed expenses and variable expenses. Go through your expenses and notate which ones fluctuate each month and which ones are basically fixed. Generally, these expenses will be your mortgage or rent payment, car payment, utilities and insurance.
Other expenses are variable, also known as discretionary spending. While you must have food to eat, you do have some control over how much you spend so even though this is a necessity, it is still variable. Common variable categories include eating out, clothing, entertainment and groceries. These variable categories are the ones we will have envelopes for each month.
With our newly devised budget, it is time to create our envelope system. On the first of every month, go to the ATM to withdraw the money you will need for all of your discretionary categories. Each category gets an envelope. Write the category name on the outside and fill it with the amount. For instance, you will have an envelope for groceries with your allotted monthly amount inside. The same goes for eating out, entertainment and other expenses your family has deemed important.
You can also use the outside of the envelope to jot down amounts spent in that category and when or to store receipts of purchases made within that category. This can be especially helpful in the first few months to help you see where the money went each month.
As the month rocks along, whenever you spend in that category, the money should come from the corresponding envelope. Once the money is gone, spending in that category is over. So what happens if for instance, the grocery envelope is empty but you still need food? Of course, you won’t do without food but use this as a warning sign that either you need to make smarter choices when shopping or your underestimated your budget amount.
This is generally not a system that you will get perfect on the first month. It may take some time of spending from the envelopes to figure out exactly how much should be in each envelope but as you get more accustomed to the system, this will become easier. Until you have the system down and know it works, avoid budgeting down to the last available penny so you have reserves if needed.
Also, some may find it difficult to go to the ATM and fill the envelopes for the entire month at once. If it’s easier, you can break it up by paychecks. For instance, military members are generally paid twice per month. It may be more manageable to divide your budget in half and fill your envelopes twice per month instead of once. If your grocery budget is $400, you will simply put $200 in the envelope at the first of the month and $200 in the envelope on the 15th of the month.
As you become more comfortable with the system and more aware of your spending, it can be easier to see where savings can be found. Be sure to set up a savings category as well and set that money aside. If you have excess money in the envelopes at the end of the month, add this money to the savings pile rather than splurging on unnecessary items.
The envelope budgeting system takes discipline but it can be a great tool to use to not only track system but manage your finances throughout the month effectively.