Wednesday, March 22, 2006A Category For Everything and Everything In Its Category
Don't spend the grocery money on birthday gifts! Budget enough money for groceries and don't use a cent of this money for other things. You buy pretty much the same grocery items every month and this amount is fairly static. Once you start using the grocery money only for groceries, you'll actually NOTICE A DIFFERENCE when you do things to trim your grocery bill like baking your own cookies, or shopping where the best sales are.
For everything else that you may need to buy, have a category, with one category called miscellaneous for things you hadn't thought of. I keep the money in envelopes in a container in the freezer. We have envelopes for kid stuff, homeschool, clothes, birthday gifts, books, entertainment, home improvement, spending money for Rand, and misc. These ones come to mind, but I may be forgetting a couple of envelopes that we have.
If you can't put much in the envelopes, put something. You will know where you stand and have a starting point to work from. It is essential to have an entertainment envelope - skipping this is no way to save. It would be like skipping breakfast to lose weight - you could end up eating twice as much at lunch! Now if you find you don't need to spend the entertainment money, that's fine - now you really have saved something, but do not fail to budget for the possibility of needing it. Yes, I do mean to use the word need there! Not that entertainment is actually a necessity, but treat it like one when you plan your budget - don't treat it like a necessity when you are spending the money, only when you are planning. Mark each envelope with the category and the amount and how much you would really like to have in the category. We fill our envelopes every 3 months. In clothing, there is $250 added every 3 months. Before we started doing this, we would have never even considered spending that much on clothing. Not saying we would have never spent that much, mind you - we just wouldn't have planned to! You need to budget for everything, and feel free to spend what you've budgeted if it is needed. Now here is the cool part: if you do spend less than the full amount, you have some extra money in that category when you refill the envelopes. In our case for the clothing envelope, if we spend only $150, there is $100 leftover and when $250 is added after 3 months, there will be $350 now set aside for clothing. If the envelope ever gets $1000 it is full and the overflow is used for other things. When large purchases are anticipated, you can plan to spend less in the months leading up and have the envelope fill up as much as possible. By next winter, we are needing to save for 2 pairs of new boots and 1 winter coat. I guess I will divide the money at some point and put the boot/coat portion in the bank to gain interest, while keeping the rest in the envelope. Each category has its own amount and its own full-line.
I have found it extremely helpful to use envelopes and "real cash" as we have a much clearer idea of where we are at all the time. We can see when an envelope is getting near empty and adjust our spending accordingly. We tend to spend more wisely because of the fact we are using cash and not a credit card. With cash, if I bring $20 to the store, I only use the $20. With a credit card, I would not have a problem spending say $28 when I know $20 is the amount I was prepared to spend.
Over time, as you see a few of your envelopes reach their full-line, you will find you've freed up some extra money you never used to have to use for savings or other priorities. And you have the peace of mind that there is enough money laid aside for everything you are going to have to spend on.
This may seem like a strange method - putting aside so much money in advance of need when it could be used or invested in the short-term. But if you've never managed to save anyways in spite of all your good intentions, or worse yet, if you've had a persistent problem with falling into debt, then this will help you break that cycle.
In our home, money saved without a purpose is soon spent without a purpose!
Next installment in this series: Give off the top; Live off the rest...