Can you believe it’s almost February? Slowly, we can look forward to being halfway out of winter, pink and red chocolates and hearts are flooding our storefronts…. and the dreaded time of finances. Between the Christmas credit card bills arriving, RRSP deadlines approaching, and slowly starting to get your tax forms, it can be pretty depressing. Also, you may have made New Year’s Resolutions about your finances, whether it’s to spend less frivolously, save more, pay down debt, get on a budget, you name it.
That’s why today I want to share a simple and easy way to get your finances under control. It’s the simple, tried and true envelope system. It’s really not an innovation at all, and it’s been used with some minor variations all over, whether with jars or TV shows, but it really works! I hadn’t actually ever heard of it, but while vacationing in Montreal with my husband over the holidays in 2011, we sort of came up with our version, and I can honestly attest to the fact that this simple system has obliterated financial stress for over a year now.
First, let’s understand your categories for this simple budget. You have income (usually paycheques, also returns on investments, as well as bonuses, etc.), fixed expenses (bills), and flexible expenses (things you can affect the amounts of – groceries, donations, etc.). I have included a little sample worksheet at the end of this post as a visual aid.
First create a worksheet and list your reliable monthly income at the top (if you make commissions, leave that out for now, and just work with your base). Next, list out your fixed monthly expenses (rent, insurance, car payments, cell phone bill, hydro, etc.). Total that up for Total Fixed Expenses, and see what’s left. Now list out your debt payments, add them up for Total Debt Payments, and see what’s left.
Now the personalized part – the envelopes. List out your discretionary expenses, with reasonable estimates for monthly amounts. If you have recurring larger expenses that are not monthly, figure out the monthly amount. For example, Nick and I go to conferences in the US about 4 times a year, which means transportation, hotel, food, tickets, and any purchases while we’re there. We figured out an estimate, which we divided by 3 (since 4 cycles of 3 months would pay for 4 conferences), and figured out how much we need to put away each month, so we have the money sitting there when conferences come up. I also use envelopes for rent, and divide the rent amount by the number of paydays, so we don’t experience a big cashflow shock at the start of the month. Classic envelope categories are: groceries, grooming (salon/haircuts), charitable donations, gifts (build up the whole year, and then there’s no Christmas cashflow drain!). If you’re young, and all your friends are getting married, make a Weddings fund for gifts, dresses, transportation, etc. or a Baby Showers fund if your friends are all starting to have kids. If you travel a lot, have a Travel fund. Have an Entertainment/Fun Money fund, so you can have fun and not worry about it.
Once that’s done, total it up, and record the Total Envelopes amount, and then… see what’s left. Is there something left? Yay! You get to go shopping, or save for a rainy day, or pay down debt even faster! Is there a negative? Then be realistic, and go back and cut some expenses, either discretionary (the easiest to cut – ramen noodles anyone?), or fixed (maybe you don’t need that super-unlimited cell phone plan? Or you can get a family plan that’s cheaper?) The point here is to trim and adjust as needed so you come out with a surplus, even if it’s modest. It may hurt at first, but it really does pay to be brutally honest with yourself. Case in point – we managed to eliminate about 25% of our entire household debt as a newlywed, fresh out of school (read: wedding and student debt) couple in a year, all while maintaining a pretty great lifestyle and going on 3 vacations. If you don’t plan to succeed, you plan to fail.
Alrighty, moment of truth done, and managed to arrive at a surplus? Celebrate this, and get some cute envelopes to label and tally your funds like this:
Now, to put your amazing envelope system into action! Keep your envelopes in an accessible, but safe spot. Write out all your fixed expenses in a calendar or spreadsheet with amounts and dates, I use a spreadsheet with my accounting background. As you get paid over the month, make sure you’ve paid your bills up until the next payday, leave some money in your account for emergency and unexpected expenses ($500, $1,000, whatever works for you), and take out the rest to fill your envelopes. This way you are easily meeting your monthly needs and payments. A super-important point here – don’t dip into envelopes once you’ve run out. Once Entertainment runs out, don’t go dipping into next month’s rent, or you’ll end up back in trouble when it’s due.
It’s really a simple system, and while yes, I’ve heard that dealing with cash doesn’t help your credit history, it’s the most effective way to get a handle on your finances. As you start to see the system working for you, make adjustments. At the end of the year, you may even have some surplus cash sitting around, which is perfect for a post-holidays pick-me-up, and financially guilt-free! Also, this means that commissions, bonuses, tax refunds – all come in as extra, so you can now decide what to do instead of having to spend it all on bills – maybe you need a bigger item for the home, or a new outfit, or maybe just throw it into savings for a bigger purchase down the road.
Okay, so here’s an example. Let’s say this is a single lady, just graduated from college with a good sales job. She makes $2,500 a month in base, plus her commissions which vary. She’s been pretty good with money, but has some debt, mainly from school. She’s not a huge spender, but lives in the city, so her rent is fairly high, and she likes to shop and go out with friends. Here’s her sample budget worksheet:
We can see that she really only has a $5 surplus, so she needs to be disciplined. This means things like shopping can only really come out of her commissions. Better yet, she should start saving with part of the commissions (see how there was no savings? very common), but then also enjoy her money.
Have questions? Feel free to ask away. Or share your smart financial tips with me! A quick caveat: consult a professional if you’re in serious financial trouble, like the close to bankruptcy sort. This post is merely helpful advice, and the system works best for those who are generally okay with their money, and are just tired of seeing it disappear on little things or stressing over expenses. Here’s to a 2013 being the year of no money stress!