(Originally written as a guest post for Sustainable Happy Life)
I have always loved being organized. As a nine year old, nothing made me happier than a freshly rearranged and reorganized room. Seeing all the organizational products at Ikea sets my heart a-flutter. Yes, this might make me seem like a weirdo, but at least I’m a well organized weirdo!
Something that needed a major overhaul when I got my first big girl job was my bank account. Even though I had this job that paid me (slightly) more money than I earned as a grad student, I had no idea where it was going. Payday would come and go and I was just as broke as I was the week before. I started by asking my friends how they kept track of money. Word of warning to my student affairs friends out there, do not ask this question to any of you friends that are engineers. The answer will just make you feel bad about every life decision you have made that got you to a job you love with a paycheck you hate. From my friends, I heard about things like mint.com and having portions of your paycheck automatically deposit into certain accounts. I also tried looking things up online but had trouble finding anything that pertained to me. Mortgage? Child care? These are not concerns of mine at the moment. Finally, I heard about the “envelope system”.
What is the “envelope system”? Well, to start with, I don’t know if it had a fancy name, this is just what I heard it referred to as so that’s what I’m going to call it. Sorry if you are the inventor of the envelope system and are offended that I am not calling it by it’s proper name. I would tell you to sue me, but I don’t have a lawsuit envelope set aside….back to my original point! The envelope system allows you to create a budget with multiple categories that limits your spending.
I’ll walk you through step-by-step of how I set up my system. The very first thing I did was make a list of the things that I know I have to pay for every month that I can’t or don’t use cash for. This might include your rent, loan payments, utility bills, and prescription medications…ladies, I’m looking at you. Birth control isn’t free yet! Subtract the cost of all of these things from your paycheck. If you already funnel some of that paycheck into savings, you’re going to want to subtract that money too. What you have left is what you’re going to work with for the rest of your budget.
Next, make a list of the things you normally spend money on. This might include food, clothes, gas, entertainment…that’s the best part of this – you can completely set it up for the things YOU spend money on. Play Magic: The Gathering? List that as a category. The second part of this step might take you some time. How much do you tend to spend these categories? If you’ve been primarily using a credit or debit card for these purchases, go back and examine previous statements to see about how much you are spending. If you don’t have a way to do this, track your spending for two or three months. You could just set some arbitrary numbers for yourself, but you will probably need to do some tweaking.
Once you know about how much you spend in each category per month (or have picked random numbers), total it up. This number SHOULD be less than the number we figured out earlier (paycheck minus bills). If not, you might need to make cuts from somewhere. The goal is to spend less than you make so you can save some money for things like, oh, I don’t know…a trip to Disney World?
Alright, so now we’re going to take a category. Let’s say you have budgeted $100 a month for entertainment (eating out, sporting events, movies). Divide $100 by the amount of paychecks you bring home each month. Write that number down along with the category name on an envelope. Do this for the rest of your categories with one envelope for each category. Now add those numbers up. That is the amount that you will withdraw from your account IN CASH every pay day. You will then put the money into the proper envelopes. If an envelope runs out before payday, you shouldn’t by anything else from that category.
And that’s it! That’s the envelope system!
What I like about it is that it is so flexible. I already mentioned that you get to create the categories. Another thing you can do is decide what to do with money left over at the end of a pay period. If you use all of the money from a category in a pay period, you can make the choice to take cash from another envelope…say using “entertainment” money to pay for gas or groceries (however it probably shouldn’t go the other way). This is also a system that is really basic so it doesn’t matter if you make $20,000 a year or $250,000 a year. It could even work with children!
The one thing I stress with any organizational system is that if it doesn’t work for you, don’t use it. You need to be able to keep up with it otherwise you will still be unorganized. There are other ways of budgeting out there, this is just one.