Budgeting is probably my least favorite thing to do. Sure it requires planning (which I love), but it also requires that I not spend money that I want to spend. And reminding myself that I'm a broke graduate student. And it makes me want to cry. At least it use to make me want to cry. Things have changed my friends. I'm finally at peace with budgeting!
About 6 weeks ago I sent an email to Chelsea asking her for tips on how she and her husband use the envelope system for budgeting. I had heard of the system but wasn't quite sure how to put it into action. The basics sounded reasonable: create a budget and use cash to pay for everything (well, almost everything). Since our bank in South Africa charges a fee every time we use the debit card, moving to a cash-based budget seemed like the best option.
Since a lot of you were curious about what the envelope system is, both Chelsea and I decided to post about how we approach budgeting using this technique. You can find her post here. While she is a seasoned expert, I'm still trying out the system. Here are the steps that I took to get started:
Where To Start – Creating Your Budget
How Much Money Are You Willing / Able To Spend?
Simple enough, right? Most of you probably have some sort of steady /reliable income because you're a big kid with a real job. Great. Look at your income and write that number down. The idea behind the system (or budgeting in general I suppose) is that every penny has a home. So think about how much money you want to put into savings each month. Good. The rest is probably what you'll use as your living expenses for the month.
Some of you are graduate students or individuals with varying incomes. And some of us (ahem) are graduate students, with a varying income, temporarily living in another country. Since this trip had been planned for quite some time, I had been saving money for living expenses. I added my designated money from savings plus a low figure for my income and came up with the amount of money I'm willing / able to spend every month.
This is 100% of my monthly budget.
Determine What Needs to be Paid in Lump Sums or With a Card.
Our landlords asked us to pay all 6 months rent up front when we first moved in. This was great because I am never concerned about paying late but it also threw my new budget for a loop. I also realized that some things need to be paid for with a debit card. Examples for myself include health insurance, student loans, and my storage unit in California. I did the following to figure out how much spending money I had left over: 1) calculated how much money I would spend per month if I paid rent on a monthly basis. 2) Calculated how much money I expected to pay with my debit card. Let's say that all of those expenses combined resulted in 40% of my monthly budget. I now know that I can withdraw 60% of my monthly budget in cold hard cash.
As a side note, I prefer to withdraw weekly as opposed to monthly. I think that it reduces my temptation to overspend. If I don't see the money I won't spend the money.
Set Up Your Budget Envelopes / Categories and Determine How Much Money Goes Into Each One
Every expense category must have a home and that home is in a separate envelope. This is going to be different for each person or family depending on how you typically spend your money. There are the categories that I'm currently using:
I also leave some extra money in my bank account as a cushion. This is especially important for me since my budget is in USD but I spend in ZAR, which means dealing with changing exchange rates. The biggest bulk of my budget goes into the food (groceries, dining out, alcohol) and entertainment categories. Since Matt and I are traveling until December we wanted to make sure that we budgeted enough money to allow us to take weekend trips and explore South Africa. Since I am temporary living in another country, my categories look somewhat different than they would at home in California. For example I would have additional envelopes for gasoline, car maintenance, etc.
Stick To Your Budget!
The Hardest Part
If I had it my way I'd have sushi and wine for every meal every day. I'd also be broke and living on the street in about 2 weeks. I only spend what I have in my envelopes. Once it is gone, it is gone. I have, however, pulled money from another envelope to cover the expenses in another. I don't like to do it often but sometimes I'm too lazy to cook and want to order pizza.
Plan What & When You'll Buy
As you can imagine, I'm not a big fan of walking around with a ton of cash so I leave all the envelopes full of that sweet money at home. Instead, before I leave the house I think about what I may need money for. I spend with a purpose and a plan. If I know that I need to get groceries I 1) plan a day to go so I know to bring money, 2) make a meal plan, 3) ONLY BUY ITEMS ON THE LIST. That last bit is really important. I have wandering eyes and often buy more cookies than I should. I have found that when I stick to my list I spend within my budget. When I let my tummy get the better of me … well let's just say I had to pull money from my ‘extra/fun' envelope to cover it.
Keeping Track of Every Penny
Whenever I buy something, I always ask for a receipt. This was the most difficult habit for me to form. Once I get the receipt I write the category at the top. Then went I get home I put the receipt in the appropriate envelope. Done and done.
At the end of each week I record how much money I spent in each category in a google doc spreadsheet. This allows me to see how I spend per period. I'm a little OCD and have a sheet for each month (broken into columns for each week) and one sheet that has all the monthly totals. I know that it sounds crazy but for me, organization is key. The minute I stop holding myself accountable I spend all my money on Kindle books that I probably won't even read (true story). Here is a screen shot of the spreadsheet that I use. All the purple cells are equations that automatically update how much money I have left to spend (because I don't trust my own math skills).
Evaluate and Revise
Did you end up over-spending in one (or more) and under-spending in another? I realized that I had budgeted too much money in my groceries category but not enough for taxis and utilities. Since I have a set amount that I am not willing to go over each week I updated my budget to have more in taxis and utilities, drawing from the excess in groceries and some of my entertainment funds (heartbreaking, I know). It sucks to have to move money out of the entertainment category but since it wasn't a necessity, it was the first to go.
There are always exceptions, right? I probably should have mentioned earlier that I built a little buffer into my monthly budget. Since I'm traveling around South Africa, once-in-a-lifetime opportunities may present themselves. Like our trip to Johannesburg. I gave myself a little cushion in my savings to allow for these types of events. BUT I try to underspend before and after the trip. For example, I underspent my budget by 40% the week after I returned from our trip.
Benefit of Using Cash
I'm not tempted to spend money that I realistically do not have. Yes I carry a credit card with me for emergencies (like a wine sale) and if I have to use it then I take that amount of money from the appropriate envelop and place in my ‘deposit' envelope to be returned to the bank (Chelsea taught me that tip).
I've only been using this system for about a month now so I'm obviously no expert. But I'm happy to report that I finally found a budget that I can follow and stick to!
Now what about you… Could you use the even lope system? How do you budget? Do you use a special system to app to keep track? I'd love to hear your thoughts!