In the past, I wrote about creating a budget and utilizing the envelope system to become more financially sound. Knowing your budget is probably the most critical aspect when trying to save. If you do not know where your money is going, you will never be able to maximize your savings. It is important to account for everything. Today, I will discuss the importance of monitoring your finances and how you can use that information to create your envelope system.
Budgeting is probably one of the most difficult things to accomplish. If you have kids, you know this to be true. You never know when your child is going to get sick and need to go to the doctor or the countless other items that have to be purchased. These surprises can certainly hurt your budget. It is essential that you create an emergency fund to accommodate these monetary concerns. Without an emergency fund, a person can get wiped out financially.
I personally would recommend keeping a expense tracking ledger where you write down everything you spend. A simple notebook would work. By doing this you will know exactly where the money is going. Have you ever thought you could save a certain amount per month, let’s say $500, but when it actually came time you fell short. Where did the money go? It is hard to answer this question if you are not tracking your expenses closely.
You really have to write everything down! If you use a debit card, for example, just look at your monthly statement. If you do not have a sound budget, it will be difficult to implement the envelope system. I would use Consumer.gov worksheet – Make A Budget for your template. I really like this worksheet and it makes creating a budget much easier.
So, how do you use the envelope system effectively? Once you know your budget you can create envelopes for some, or all of your bills. I personally recommend focusing on just a few bills that you tend to struggle with when it comes to staying on budget. There are several articles online that discuss how people spend their money on a monthly basis. For example, around 10 to 15% of your monthly income goes toward groceries. If you make $50,000 per year that breaks down to $6,500 a year or roughly $541 a month. I am using 13% of your monthly income to get these numbers.
I know everyone spends differently in this regard, so you need to use the information from your expense tracking ledger to get a more accurate number. I would suggest reading Laura Shin’s How to Budget Your Money With the 50/20/30. She mainly discusses three categories: Fixed Costs, Financial Goals, and Flexible Spending. This is a different approach to budgeting. I do not use this system, but I can see why others like it. Below is an example of how much you could allocate for each envelope:
Groceries – $500
Entertainment – $100
Utilities – $400
Miscellaneous – $200
Savings – $500
Depending on the cost of living and your own person tastes, these numbers will vary. I live in Oklahoma, so I enjoy a lower cost of living. If you want to know the average of where most people’s money is going, I would read ValuePenguin’s Average Household Budget. This article breaks down each category and shows the percentage of how much is being allocated.
In the end, everyone spends differently and you have to customize the envelope system to fix your spending. However, none of this is possible if you do not know where your money is going. I would strongly recommend putting a percentage of your check back for savings. Always pay yourself first. Even if you only put 3% back, it is still saving. I personally treat savings as a monthly bill, making sure I put that money back each month. You need to get into that mindset.
I hope this post has been helpful. If you have any specific questions please let me know. I am always interested in hearing your thoughts.