Are you following an actual budget plan or reacting to a balance sheet? Many people assume these are the same thing. Some of the confusion might have to do with the fact that many banks offer online tools that arrange all of your account activity into pretty little spending categories. Reviewing your account activity gives you a general idea as to where your money has gone – how much you spent at gas stations or restaurants … but we are talking past tense.
A real budget is an action plan that you set up BEFORE you start making purchases, while bank statements only show what you may have already done to mess up your finances. Most important, budgeting requires you to set boundaries when spending, and stop when the money runs out.
So how in the world do we do this? Do we go online and check our account activity every other day to make sure we haven’t overspent? Or, make sure we write down every purchase in our checkbooks so we know our account balance at all times? I know some people who do this and still end up overspending. They come to my office exhausted and discouraged. Exhausted because they’ve been obsessing over their finances every single day for the last month, and discouraged because it didn’t make a darn bit of difference when they still paid the electric bill late.
Then, there are the classic avoiders who simply use their check card to make purchases all month long and only look over their bank statements when they get that gut feeling they might be getting low on funds. Obviously, I am all for keeping track of your spending! But just because you know your account balance at any given time, doesn’t mean you will avoid overspending at restaurants, gas stations, or coffee shops.
So let me ask you: Do you really have a strategy in place right now for budgeting?
Do you know what your limits are when you shop at Target or Wal-Mart or the grocery store? Do you know how much you get to spend when you go out on the town with friends? If not, then I want to challenge you to put your debit card away and commit to setting up a cash system for flexible expenses. The cash system requires you to plan how much money you are able to spend before you actually spend it. And when the money runs out, you stop spending in that category. This is the definition of a budget. Simple as that!
First, write down all of the flexible spending categories that might apply to you. For example, my flexible spending categories are: Personal care (toiletries, cleaning supplies and stuff you buy at Target), Groceries, Coffee shops (yes, coffee gets its own envelope in my world), Dining out/entertainment. These are the expenses in my budget that vary from week to week. Yours might be a little bit different and that’s okay. Do what makes sense to you. The rest of my money either goes to savings or stays in my checking account to pay the bills.
Now that you have your list, assign a separate envelope or pocket of a wallet to each specific expense category. Take some time to decide how much you plan to spend in each area. Make sure you are thoughtful about this and set a reasonable spending limit based on what you can afford and your past spending patterns.
Now that you have a budget for each expense, you can pay yourself a weekly cash allowance and fill each envelope with a planned amount of cash. If you run out of money before the end of the week, don’t panic! In a few days you will be refilling that envelope again and anyone can get through a couple days without cash if necessary, right?
Add Cash to your Stash
If you still have cash left in some of your envelopes at the end of the week, leave it there and add more cash to your stash. Remember that the amount you spend in flexible areas will vary from week to week. If your cupboards are full this week, then you might not need to buy any groceries.
The idea here is that each envelope acts like a mini budget to keep your spending in check. You spend a little, and maybe add a little, but you ALWAYS stop when the money is gone.
And please avoid the temptation to steal from other envelopes. Don’t take money from your grocery envelope just because you didn’t spend any of that money this week. Trust me when I say you will need that extra money for more groceries later. Continue adding cash every week so the envelope is full when your fridge is empty.
If the cash and envelope system ties your stomach in knots, then I encourage you to figure out why.
Budgeting is not meant to deprive or punish you; it is an action plan for your money to help you meet your other goals and dreams. You work hard and deserve to make that paycheck work for you, rather than letting that hard earned cash escape through the holes in your pockets.
Taking control of your financial life starts with a budget. The cash envelope system is a great financial tool to get you started now. Once you start sewing up those holes, you just might notice your pockets are filling with change, and this is where the real fun begins.
Need help creating your cash and envelope system? LSS Financial Counseling service offers financial counseling and budget help for free. Our counselors will provide you with the tools and guidance to take charge of your finances. What are you waiting for? Give us a call at 1-888-577-2227 or visit our website at www.conqueryourdebt.org to schedule an appointment today.
Author, Mary McKeague is a Certified Consumer Credit Counselor and specializes in Debt and Budget Counseling. Subscribe today to get notification when a new blog is posted by Mary or one of our other amazing experts.