Living on a budget - the envelope system

How to enjoy the freedom of living within your means.

Article highlights

• Learn to think of budgeting in a new light.
• Factor in what you really spend every month.
• Find more money for the things that matter to you.

Being on a budget takes discipline but it doesn’t mean you have to give up the things you love. In fact, it can help you stretch your money further, giving you peace of mind in a tough economy. Use these tips to help you stick with your budget.

Have a positive outlook.
Think of a budget as a spending plan that you control. It’s a tool to help you decide in advance how you will divvy up your earnings each month to pay your expenses. By plugging spending “leaks,” like that second latte, you’ll find money for the things you really care about.

Don’t forget the small stuff.
Remember to factor in both fixed expenses and variable ones. Fixed expenses, like your mortgage, don’t change every month. Variable expenses, like birthday presents or your electricity, may vary a bit or don’t recur every month. Save your receipts for a few months and keep a daily spending journal, so you don’t forget to plan for these variable costs.

Download now.
Spreadsheet to Consolidate Your Monthly Spending

The envelope, please.
The “envelope system” is one of the easiest ways to budget. You can create “virtual” envelopes for each category of expense by electronically using a spreadsheet. Simply set aside a specific amount of money each month for each type of expense, such as food bills and clothing. Pay with your debit card so you can track your expenses in online banking, which you should do routinely. The records from your spending journal will fill in any missing expenses. At the end of the month, subtract what you’ve actually spent from what you’ve listed on your spreadsheet.

Taking these steps will help you make sure you are staying within the limits you’ve set for each type of expense. Another benefit of using debit cards for variable expenses is that many banks offer cash back bonuses on debit card purchases, which provides some extra savings on an annual basis.

Money Management Tip #2

Find out about retailers' sales in advance - you can often sign up on their Web sites for e-mail alerts or ask the sales staff when you shop.

Tap your creativity.
Don’t spend more on any category than the amount you put in its “envelope.” If you empty it too early, find a way to make it to the next month without spending more. For instance, if you spend too much money on carry-out lunches for work, brown bag it until next month.

Find new ways to save.
Once you’ve tracked your spending for a few months, you’ll probably realize that you can trim your spending in certain areas by using this system. You don’t have to cut back on all the good stuff, like entertainment, to save. Refinancing your mortgage may put even more money in your pocket or purse –to help you balance your spending.

Take action now.
Customize the amounts that you set aside for variable expenses to reflect your preferences. If, say, you feel isolated if you don’t meet a friend for dinner each month, leave room in your budget for this. Find ways to cut back on things that are less important to you.

Taking control of your budget

How to get back on track with your budget.

Article highlights

• Pinpoint the main areas where you overspent.
• Reevaluate your budget allocations.
• Get a perspective from someone you can trust.

You put time and effort into creating a budget but somehow, you overspent. It can be discouraging to miss the mark, but recognizing that you made a mistake is the first step toward getting back on track. Here’s how:

Take a look at your spending.
Chances are, you’ve overspent on the variable expenses in your budget. These can be harder to estimate than fixed expenses. Pinpointing the types of purchases that derailed you can help you stick to your budget next month. Start writing down your daily purchases in a small notebook, often called a spending journal. Are you spending too much on lunches out at work? Do you go overboard ordering music on the Internet when you’re bored? Next month, try to avoid situations where you tend to overspend. And ask yourself if you really need each purchase before you make it. Delay and postpone!

Do a reality check.
Maybe you exceeded your budget because you held yourself to a standard of frugality that isn’t realistic for you right now. For instance, you may have planned a rock-bottom food budget but found that ordering a take-out pizza once a week was a sanity-saver on nights you had to work late. If that’s the case, you may want to add occasional take-out purchases to your food budget but cut back on something else.

Look for ways to save on fixed expenses.
Make sure you are getting the best deal on your utilities, cable and telephone services, and banking by calling your providers to see if they’ve introduced new plans or deals. Some will do a free usage analysis to help you. Also consider getting rid of some fixed expenses entirely, such as a car insurance payment for a teen-age child who is capable of getting a part-time job and paying this bill directly.

Make some tough decisions.
Some people don’t stick to their budgets even after losing a job because they can’t accept the reality that they can no longer afford to live the way they once did. You may feel ashamed that you have to cut back, especially if certain luxuries are typical for your social circle. But if you continue to live in a way that you can’t afford, you will rack up debt and put your family at financial risk.

Money Management Tip # 1

Never let your checking account balance dip below $100 and you'll reduce your chances of paying overdraft fees from your bank.

Get an outside perspective.
It can be hard to recognize when we are caught up in mental traps that work against us financially, so asking a frugal friend or family member for advice may be helpful. Or, get a free budget analysis from a credit counselor at a nonprofit agency. Contact the Association of Independent Consumer Credit Counseling Agencies (http://www.aicca.org.) or the National Foundation for Credit Counseling (http://www.nfcc.org) for a referral.

Take action now.
Review your spending journal today to see which purchases blew your budget. If you stopped keeping track, start again now. It may be inconvenient to write down your purchases, but once you make it a habit, it will help you get your spending under control.

Treating savings as an expense

How to build your savings with automated deposits.

Article highlights

• Stay ahead of unexpected expenses.
• Build an emergency stash gradually.
• Work toward long-term financial goals.

How to build your savings with automated deposits.
It’s hard to find a silver lining in a recession, but many of us have found one: we’re putting more money in the bank to protect our families in case of a job loss or other financial emergency. The personal savings rate reached more than 4 percent in the early part of 2009.¹ Now’s the time to build your savings. Automated savings deposits can help you do it gradually. There are three main types of savings you can build automatically:

A short-term cushion.
Keep a minimum cushion of $100 in your checking account that you never touch to help protect yourself from overdrafts. You should also have $500 to $1,000 in your savings account for unexpected expenses you can’t postpone, like a car repair or a last-minute family trip. Can’t put this much away all at once? Set up automatic transfers from your checking account each month using online banking or by working with your banker directly. Make $50 monthly deposits for one year, and you’ll have $600.

Savings Tip #3

If you live in an apartment in a city where rental prices are dropping, your landlord may be willing to give you a better deal so you'll renew your lease.

A long-term emergency fund.
Many experts recommend putting six months’ worth of living expenses into a separate savings account to protect your family in case of a medical emergency or job loss. Sound impossible? Have a fixed amount, such as $100, deducted from your checking account each month and put into savings; you’ll be in better shape than if you didn’t save anything at all. You can set up automatic transfers from your checking to savings account through your online banking account. Add windfalls such as a tax refund, and your emergency fund will grow even faster.

Long-term savings.
These accounts will be used to fund big goals in the future, such as your retirement or your children’s college education. Some may seem far off now, but the earlier you start saving, the more time you will have for your money to appreciate.

• Retirement: One recent study found that retirees will need to save 126% of their ending workplace salary to maintain their standard of living, factoring in inflation and medical cost increases.² Save automatically. If your employer offers a 401(k), you can usually arrange at work to have automatic deductions made from your pre-tax pay and direct deposited into a 401(k) plan you specify.

• College: Wondering how much to save for your children’s college education? Use the cost projector at FinAid.org (http://www.finaid.org/calculators/costprojector.phtml). How do you set up specialized savings deferrals so they’re automatic? Fund 529 college savings plans with automated deposits deducted from your checking account.

Take action now.
To set up these three types of savings plans, go to your bank’s online banking Web site or visit a local branch, where a banker can assist you.