Step 2 – The Envelope System


Step 2 – The Envelope System

of The Total Budget Makeover Series

Step 2 - The Envelope System of The Total Budget Makeover Series

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Step 2 – The Envelope System of The Total Budget Makeover Series is a system of checks and balances that keeps you honest with yourself about your spending.  It’s hard to set firm spending limits when you can easily swipe your card or write a check for purchases instead of handing over cash money.  The Envelope System constantly reminds me that I am meeting my goals of saving up $X, XXX in cash for a brighter future for my family.

At the end of Step 1 – What Can You Actually Afford of The Total Budget Makeover Series you should have a very detailed list or journal of your spending habits and three priority piles of where you spend your money.  You need to have a clear understanding of how, why and where you spend your money and a worksheet of things you will work on changing to help you waste less and save more.  Double check your bank statements for any charges, fees or payments you forgot to include in your list.

Before you sit down to work out your new budget, grab a pen or pencil, paper, a calculator and a handful of envelopes along with your priority piles you created last week.  We will be working out some math and crunching numbers before it’s all said and done!

Use my FREE downloadable Budget Spreadsheet to create your personal budget

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My wonderful husband actually created this spreadsheet for our family budget and he has given me permission to share it with my readers, so thank you Hunny Bunny!  I like to include free spreadsheets for those who might not have the time or desire to create one from scratch or for those who might not know how to make one.

I use spreadsheets for everything related to finances and I love to share them with you so check out my free downloads page for more.  I will be including a stockup price list and freezer prep list in the next post Step 3 – Creative Financing of The Total Budget Makeover Series.    

The stockup price list gives you a price point to shoot for when stockpiling for your family.  For example, you shouldn’t pay more than 25¢ – 50¢ for your shampoo or conditioner with sales and coupons.  The freezer prep list includes items you probably never realized your could freeze like butter and cream cheese and shows you how to prep and store it if you don’t use a Food Saver Vacuum Sealer System.

Plug in the fields from your Top Priority Pile

Now that you have your priority piles in hand you can plug in the fields for your budget spreadsheet.  We will begin with everything in your Top Priority Pile.  Remember, you can’t live and function without paying these so get them in the spreadsheet first because you will be paying these no matter what.

My spreadsheet only includes a few fields as an example but you can easily delete the text and enter your own information.  Once you get your Top Priority Pile names and amounts entered, name your budget and save it.  We call ours the Bristol Family Budget and I have it on my desktop screen so I can easily access and review it daily.

Projected Annual Income

Next I want you to take the time to calculate your projected annual income.  I say “projected” because there really isn’t a reliable way to accurately calculate future earnings.  The only two certainties in life are death and taxes, everything else is subject to change at any time!  We will be basing the rest of the year’s budget on the pay rate you make right now, today.  Don’t include overtime, even if it’s guaranteed or you earn it on a regular basis.  That overtime will go into your “extra” envelope and help to pay down debts or grow in savings.

We are going to be very conservative about this projected amount because it’s always nice to have too much money left over at the end of the month rather than too much month leftover at the end of your money.  Did you like my play on words there?  Haha!

Hourly wage earners use this formula to calculate your annual income:

Amount of minimum hours you work per week –                           40 hours

Times your hourly pay rate 

Amount you are paid hourly                                                            $10/ hour

(we will use $10/hr for this example)  

Multiply the two numbers – $10/hr X 40 hrs a week =         $400 per week, or your projected weekly income

To get your projected annual income simply multiply $400 (per week) X 52 weeks = $20, 800

So now you have your projected annual income and weekly income.  Do your budget math on a sheet of paper and keep the figures close by because you will refer to them several times before completing your budget spreadsheet.

If you work part-time or your hours can vary from week to week then use the lowest possible number of hours you will work in a week.  I once had a job where I worked 32-36 hours per week so I would multiply my hourly wage by 32 just in case my employer tries to cut hours and schedules me at my minimum required hours to work.

If you earn a monthly salary then use your base pay only.  Don’t include bonuses, per diem or anything extra like housing and food allowances.  My ex-husband served in the Army while we were married and the housing and food allowances are not guaranteed.  When we lived in base housing they didn’t pay a housing allowance because they provided the housing and utility costs.

The Army pays for the active duty soldier’s food allowances, but not any dependents the soldier may have.  Soldiers living in military quarters called barracks won’t receive housing and food allowances monthly because they are free and the soldier can eat free food at the “chow hall.”  This is why I say to only use your base pay if you get a monthly salary.  Anything else will be considered extra and you should stash it away as much as possible.

I know this sounds like you’re living on bare bones, but keep in mind that this is a TOTAL budget makeover.  Reaching your financial goals doesn’t mean taking on another job or earning more money.  It’s about making the money you have work for you instead of you working so hard for your money.  Or as some say, “living within your means.”

Inconsistent and Irregular Pay

If your pay is inconsistent and irregular then do your best to find permanent and steady income.  Until then, do your absolute best to save up a week’s worth of wages and work up to a full month of wages saved.  Come back to creating a final budget once you have a steady and reliable income or your pay is at the very least somewhat stable.

The same is true for anyone in sales and earning commissions.  There’s no way to predict what you will earn so try to save up as much as possible by cutting out your extra expenses using my creative financing methods (in the next post) and saving as much cash as possible to help supplement for the months when you hardly earn any wages at all.

I know my advice to wait on a budget might seem a bit defeating but you can’t create a reliable monthly or weekly budget if you have no idea how much you will be making week to week or month to month.  Use my creative financing methods in step 3 of this series and make it your goal to save between 10% – 20% of your weekly income to set aside.  You can use my free downloadable budget spreadsheet to help you keep track of your weekly pay, what bills you paid and your extra savings.  If you can’t manage to save 10% – 20% per week, then set aside something, anything at all, and stuff it in an envelope or jar to build a little emergency fund in case you don’t earn any wages for any amount of time.

Calculating your Annual Living Expenses

We will take the projected annual income from the example above – $20, 800 and we will deduct your annual living expenses.

Now I want you to go to your spreadsheet and add up the amount of bills you plugged in to your spreadsheet from your Top Priority Pile to get your monthly expenses amount.  If you use my spreadsheet then the monthly living expenses amount will be reflected in the total field at the bottom of the table.  Remember, these are the items that you MUST pay in order to live and function.  Your income will go to pay these first, no matter what.

Example for this individual:      

  • Rent                   $ 400
  • Water                $ 50
  • Electric             $ 100
  • Student Loan   $ 80
  • Auto Ins            $ 100
  • Phone bill         $ 75

Total Monthly Amount:  $805

Step 2 - The Total Budget Makeover Series Spreadsheet Graphic

I do realize that amounts will vary greatly in these areas and my numbers are not entirely realistic for some, but for the sake of using an example with numbers, let’s pretend they are realistic and workable.

Hey, what about taxes and deductions?

 I did not calculate taxes and deductions for this example.  We must all pay our yearly taxes and our deductions can vary greatly from family to family.  How much you have deducted from your pay depends upon how many exemptions you claim, your marital status and your income tax bracket.  Self-employed individuals pay a higher tax percentage than the standard 18.5% because most employers pay a portion of your federal taxes for you when you work.

Calculate your “net pay” (after taxes & deductions)

I use my husband’s lowest net pay (paycheck after taxes and deductions) for a six month period to calculate our projected annual income.  Since his employer has open enrollment for benefits once a year our deductions won’t change for the entire year.  I calculate our projected annual income by gathering up six months of his pay stubs and I write down each pay amount on a list.  Then I cross out the lowest and the highest paychecks for that six month time frame.

I cross out the lowest amount because it is most likely caused when he used his vacation or sick leave and he did not work a full 40 hour work week or earn any overtime.  I cross out the highest amount because it was probably a holiday week and he earned loads of overtime.

He works at a grocery store so Thanksgiving and Christmas are times when he’s guaranteed to work overtime.  Keep in mind that I don’t count his overtime in my projected annual income budget so when we get this unexpected extra income it goes straight into one of our other envelopes, usually the yearly clothing budget, to make sure everyone has what they need.

Once I cross out the highest and lowest amounts off my list, I find the average by adding the four remaining figures and then divide by 4.  Nothing scientific or complicated here.  I also use that amount when figuring my projected annual income to help figure out our yearly clothing allowance, vacation and eyeglass budgets so I stay right at or under our projected annual spending budget.

I use the exact amount he gets paid in my spreadsheet when calculating how much income we earned and how much income we spent per month and for the year.  The exact pay amount also helps me to see if I really do come under budget when calculating our projected yearly income and when paying our bills.

Variances in your budget

I look at each month and see how much came in and how much went out.  These numbers need to be pretty close to know that I am on target with meeting our yearly goals.  If you conservatively “estimate and project” your income and how much is left to spend then you should only have a few dollars in difference between the two final numbers.  Hopefully you were extra conservative, creative and frugal and you have extra leftover more times than you come up short.

Our electric bill varies from month to month so the $17 a month I saved on my total bills these past few months will help cover any overage I may have in upcoming months this summer when our normal high is 95° – 99° daily and our A/C unit is running constantly to cool our home.

Ways you can easily create unexpected income without getting another job

I receive offers in the mail all the time from major retailers all year long since I sign up with my coupon/junk email account.  They send me dollar off coupons ($10 off a $10 purchase), percent off coupons and bonus coupons regularly.

I get to regularly use a $10 off a $10 purchase at JCPenney or Kohl’s to buy something we need for free.  I always find clothing for one of my three kids on the clearance and sales racks and even if it’s just a pack of socks or undies, it’s money I get to save in our clothing budget envelope and spend on more pricier items like winter coats or better quality shoes.

I’ve used these coupons to purchase dish and bath towels, kitchen and bath rugs and mats, sheets sets and scarves for myself.  I love scarves and I am always looking for ways to grow my collection when it’s free!

I contact my favorite brands and products and compliment them on their products and request coupons.  Click here to read the details and to download my workable list so you keep track of who, when and how often you can contact them and how generously they rewarded you for your time.  I did some two insanely good diapers and wipes deals just because I wrote to Huggies and Pampers.  Click the link above and read the post to see how I paid a final cost 28¢ for 1,096 Huggies wipes!

I also participate in mail-in-rebates and coupon phone apps that pay me money back for purchasing their products.  This extra money trickles in all year long and I slowly add it to my “extra” envelope to disburse into the clothing budget or anywhere I need it throughout the year.  If I have any extra funds leftover at the end of the year then I will either use it for next year’s budget or spend it on a purchase for our home that benefits all family members, like the new refrigerator we bought this year.

Back to our projected spending income 

Now that we got taxes and deductions out of the way, we can take our monthly living costs of $805 and multiply that by 12, because there are 12 months in a year, and you get $9660.  This is your yearly cost of living and since I had you calculate on the conservative end of your projected annual income, you see the bare bones of your cost of living in these figures.

Keep in mind that I am not calculating taxes and deductions in my example because it varies so much for each individual and circumstance.  

Subtract $20,800 (your projected annual income) from $9,660 (your projected annual expenses) and you get $11,140 (your projected spending income).

Your projected spending income

This amount of $11, 140 – or the projected spending income, will include everything you will need for the year.  Things like groceries, gas, clothing, medical expenses including eyeglasses, contacts, yearly exams, oil changes or maintenance on your car, anything you need for your home like A/C filters, garden hoses, fuel for your lawnmower if you cut your own grass.  I can’t list everything here because all of our needs and expenses are different but you get the idea.

You need to know how much you have left to spend every month and every week in order to accurately calculate what you can afford in a yearly clothing budget or other necessities throughout the year.  I prefer to use part of my income tax return to cover the yearly costs of clothing, vacation, eyeglasses and to get a jump start on our budget.  We also used part of our tax return to pay down debts and save cash money in a bank.  We consider it extra income and we account for every penny of it.

However you decide to stash away money for your yearly needs, be sure that you are accounting for every penny you spend.  You can’t control your money if you have no idea how much comes in and how much goes out of your household.

I know of some savvy budgeters who save a little each week in their envelope to reach a specific goal.  They write the dollar amount they want to reach, for example – $500 at the end of the year.  Divide $500 / 52 weeks = $9.62.  They religiously save that $9.62 a week, every single week and at the end of the year they have met their goal.  To save time and create less of a hassle you can always have your bank draft out the amount you want to save into another account for you.

Your Monthly Spending Income

This section is where The Envelope System comes into play in your budget.  Your monthly spending allowance will be determined by how often you are paid, whether weekly, biweekly or monthly.

For those who are paid monthly, simply take the $11,140 of your annual projected spending income for the year and divide it by 12 to get your monthly spending allowance.

If you get paid once a month

$11,140 / 12 = $928.33

For those who are paid biweekly, or every two weeks, divide your annual projected spending income by 13 since you actually have 26 pay periods in one calendar year.

If you get paid biweekly, or every two weeks

$11, 140 / 13 = $ 856.92

And finally for those of us who get paid weekly, like my husband, divide your annual projected spending income for the year by 52 since there are 52 weeks in a year.

If you get paid every week

$11, 140 / 52 = $ 214.23

If you are paid every week then I highly recommend you take the time to calculate your projected annual income for each month.  Four months out of the whole year are five weeks long.  For 2015, those months are April, July, September and December and I have included the extra week in each month’s budget spreadsheet for you.

Can you live with what’s left?

So now that you’ve figured out what’s left in your budget, are you happy with that number?  There are a few more things we need to do before you can stuff your envelope.  There are also several ways to do it so find what will work best for you.

The amount that’s left over every month still has to help cover your non-vital items in your Secondary Priority Pile.  You also have to calculate gas and groceries.  Gas and groceries are so flexible and it’s for this reason alone that I don’t include it in the Top Priority Pile. You may not want to eat PB&Js and bologne sandwiches to survive, but would if you had to.  You could also wake up early and walk, ride a bike or take public transportation to work if you can no longer afford your car.  You also have complete control in the amount you give yourself to spend in those two areas and they can vary from month to month.

Notice how we figured out what’s left after paying your Top Priority Pile?  Doing this will ensure that you can sleep better at night because you know you are taking care of your priorities.  You will also need to try and eliminate as much as possible in your Secondary Priority Pile so that you can keep more of your own money instead making someone else’s financial dreams come true with debts!

This is where creative financing will come in to help cut costs and save money but I have to cover that in the next post or this will become a book instead of a long blog post.  I’ve already listed a few examples in Step 1 – What Can You Actually Afford? so it should help with getting your creative ideas flowing.

Tweak that budget!  And then tweak it again! 

So let’s just say that you’ve reworked your Secondary Priority Pile and you realized that you don’t watch that much TV in a month.  Instead you spend way more time watching Netflix or whatever paid subscription service you use and so you can save yourself $50 a month by omitting the cable bill.  You now have an additional $50 to use towards paying some other bill (it would almost pay my water bill) or pay down debt, like your student loans.

Practical Money Management Hack:  Pay down your student loans as fast as you can!  They are like mortgages and no matter what happens to you in life, you must pay them.  There are even a few instances where death does not forgive the loan amount, such as co-signing with another borrower.  I know this from working at SallieMae for a while many years ago.  I also learned about the Power of Compounding Simple Daily Interest in the extensive training they put me through.

Student loans are a big money making business and they suck the life out of you and bleed you dry if you ever stop paying on the interest at any time.  Student loans are like a cancer and if you don’t cut it out while you can, it grows and spreads and takes over your whole life.

In all honesty, I don’t recommend financing your education if at all possible.  Work, save and pay cash for your education or take one class at a time while you work.  It might take longer to get your degree but how can you honestly say you have peace of mind when you graduate with a college degree and you have the pressure of repaying thousands of dollars while trying to find a decent job in your field?

Find anyway that you can to pay off any student loan balances as fast as you can.  Beg relatives to loan you money, donate plasma and use the money you receive to pay it off.  Sell anything you can on consignment, have a garage sale, take on extra jobs, do whatever you can to pay it off as fast as you can.  And never, ever put it in deferment or forbearance because the interest will cap at the end of that period and can cause your loan amount to double or triple in some instances.

Like that hack?  Let’s get back to stuffing envelopes!

After reviewing your Secondary Priority Pile and finding a number you can live with, decide if you want to use a weekly or biweekly budget.  I like to shop for my groceries on a weekly basis because I am an avid couponer.  I believe that I actually over spend on groceries by shopping once a month than I do when shopping once a week.  The grocery stores change their sale items every week and if I buy what’s on sale that week then I save more.

I also find that I might want to change my mind about what I’ll be cooking for dinner and I don’t have that flexibility if I have a freezer full of food I already purchased for the month.  One last point to make about weekly grocery shopping, you can spot clearance and unadvertised sales when you shop weekly and save more money to keep in your envelope.

My household weekly budget

My household weekly budget comes out to $136 a week for my family of five, so I will stuff $136 a week into my envelope each week.

This $136 is my grocery AND gas weekly budget.  I drive a Chevy Trailblazer that guzzles gas but I only drive a few miles around town a week so I only need to fuel up every three weeks.  My husband drives a Chevy Traverse that is awesome on gas mileage and he only drives to and from work and around town a few miles so he can fill up twice a month.  With gas prices as low as they are right now, we can afford to fill up our cars every month for $120.  But when I reduce the $30 a week for gas that leaves me with just $106 a week for groceries for all of us.

My youngest is one and still in diapers so my weekly budget includes diapers and wipes which can easily eat up a weekly budget if you don’t use coupons and shop sales.  My cost for purchasing my weekly newspapers for couponing also comes out of this weekly gas/grocery budget.

I have read books and blog posts where bloggers and savvy couponers manage to only spend $4 -$7 a week to feed their family of four.  I haven’t reached that point just yet, and I am not sure that it’s entirely possible in my region, but I am optimistic!  We eat loads of fresh fruits and vegetables and I strictly limit the processed foods in our diets.  I think we eat well on our $106 a week budget thanks to couponing, weekly sales and promotions and my extra 10% discount on store brands at H-E-B since my husband is an employee.

Dining out budget, yea or nay?

We decided not to allocate any funds into a dining out budget this year because we have more than enough in our stockpile to feed us.  We do allocate an undisclosed amount of money for our anniversary dinner but it’s a once a year expense and we really go all out and treat ourselves to a luxurious meal.  It’s for this reason alone that we don’t allocate anymore funds to our dining out budget for the whole year.

That doesn’t mean we don’t eat out at all, it simply means that I have to find really inexpensive weekly meals to cook and save up the cash in our grocery budget if I want to splurge for a family meal from Panda Express.  I also have a coupon binder dedicated entirely to restaurant coupons and offers and we don’t eat out unless we can eat on the cheap with coupons.

In most instances this means we eat lots of rice and beans and we quickly learned that the $40 we blew on the Low Mein and Orange Chicken from Panda Express was good, but it wasn’t that good – not to the point of skimping on our budget all week long for it!  We also decided this year that we were committing to eating healthier and that means far less fast and convenient food and way more home cooked meals so it saves us money both ways.

One last point on dining out –  you would be surprised at how many fast food establishments are now giving away free items on a regular basis.  Chick-fil-A has gone all out this year with their recent free small coffee for all of February and last week they handed out free Frozen lemonade drinks that were so good and addicting.  Dairy Queen had a free cone day and there are numerous others to list.  So save your money and wait for the free offers to treat your family to goodies.

Gosh darn it….one more point, because it’s too good not to share.  If budgeting and saving is new to you, then pay attention and keep in mind that fast food places like Sonic Drive-Thru and Taco Bell offer happy hour specials that make grabbing a bite to eat or a refreshing drink super cheap.  More about dining out on a dime in the next post…promise!

Practical Couponing for Busy People Method Hack:  Purchasing a newspaper subscription is convenient and easy but you can end up wasting a bit of money on the papers that don’t have the newspaper inserts throughout the year.  We don’t get coupon inserts in the Sundays papers on certain holidays throughout the year and I am not willing to pay the cost for just the store ads when all of the ads are available to view online.

I admit that I also not entirely loyal to purchasing the same paper every week.  Some weeks the Dallas paper is better for me and other weeks it’s a better fit to purchase the Austin paper.

Check your free local newspapers and see if the Wednesday and Sunday editions have the coupon inserts in them.  You can save quite a bit of money doing this.  You can also visit your local library or recycling centers to see if they have any free inserts or coupons you can have.  Ask your friends, family, neighbors and co-workers to save their unused inserts for you.

I sign up for Sunday Coupon Previews by email from bloggers who list the weekly coupons for the papers I buy.  I compare which ones would be the most beneficial to me for the week and I purchase only the ones I want in the quantities I need.  If there aren’t any coupons that I want that week in the papers, I save my money and go hunting for coupons in the stores, online by searching the databases for printables and I work my list of contacting my favorite brands for coupons.

Like that hack?  Now back to stuffing envelopes!  

Still there?  Still with me so far?  Sorry this is long, but it’s so important to tell you everything you need to know about this budget makeover.  I’d rather tell you too much than not enough!  So now you know, I have a weekly budget amount of $136 for groceries and fuel and I stuff that in my envelope labeled Week 1 Grocery/Gas.   

The Total Money Makeover - The Envelope Spending System

Since my husband gets paid once a week, we decided to just withdraw the weekly amount every Sunday at the bank instead of stuffing all of the weekly envelopes with cash.  But this also means that I leave my debit and credit cards at home when I go shopping.

It also means that even though I spot an awesome deal to stockup, if I don’t have wiggle room in my budget, then I can’t buy it.  This is a bit hard for me as a practical couponer, but you can see from my family’s coupon stockpile that we really don’t need anything else right now anyway.  But hey, I am still entitled to complain and say that it stings at times to walk away from that almost free deal!

Step 2 - The Envelope System of The Total Budget Makeover Series - My Coupon Stockpile TODAY

Step 2 - The Envelope System of The Total Budget Makeover Series - My Coupon Stockpile TODAY - 2

As hard as it may be, I must walk away from good deals when using my budget.  It’s a good thing since I really don’t need anymore laundry detergent at the moment!  

My envelopes are empty!!  

We leave our bill money (from the Top and Secondary Priority Piles) in the bank instead of leaving envelopes full of money lying around the house.  We only use our bank cards to pay bills and leave them at home when we shop.

My envelope system is just a little different from most because I don’t encourage you to stuff all of your envelopes at once and leave them all around your house.  I don’t believe it’s safe and why create temptation for anyone, including yourself?  Or worst case scenario, your home is burglarized and cash money is the hardest thing to recover since it’s hard to trace.

I recommend you keep as much money in the bank as possible but use one envelope to hold your weekly budget grocery/gas money in your purse or bag.  I actually have a “coupon wallet” and you can usually find them at Dollar Tree Stores.

It’s a small accordion file, and I use it as my wallet when deal shopping.  It contains the coupons I will use, my cash money that I need for my trip and my list or spreadsheet.  It makes shopping so easy because all I take are my two coupon binders, my coupon wallet, my phone and my keys.  Less to keep track of and less for me to lose!

You can also see two of my other envelopes pictured above.  One is our yearly clothing budget and the other is our extra fun money.  I write out lists of how much is in each fund and keep tabs on how much we spend instead of keeping envelopes full of cash around the house.

The real reason they are empty….I am so sly!  

The real reason I prefer to keep my envelopes empty is to avoid being the bad guy when my two school-age kids ask for things like video games, toys or a trip to Chuck E. Cheese.  We have sat them both down and explained the family’s goals of saving money and why we are using a budget and how it works in terms they can understand.

I never say the actual word “NO” when they make a request for extra purchases anymore.  I am also not the bad guy withholding something from them “just because.”  Now Mr. Budget takes the fall and I am still the good and loving mommy.  I turn things around by asking them how can we work it into our budget and I give them a few ideas to try.

When they ask if there’s anything extra leftover from last week, I simply show them last week’s grocery envelope, which has been empty and tell them that Mr. Budget is empty-handed right now.  They feel like it’s fair because they can see with their own eyes that none of the family members get anything extra because the envelope is empty.

To make them feel like they are a part of the planning and managing of our weekly funds, I get them involved in weekly grocery and coupon planning.  They help create the grocery lists by taking inventory of what we need each week.  We find using perishable items like bread, milk and eggs to be the easiest for them to track.  We put everything on our list that is necessary for the week and then we figure the cost together.

They understand that since they pack their lunches three days a week that first priority in the grocery list is for the food items we need to pack their lunches.  It’s incredible how fast they stopped asking for cookies, candy and junk food when we grocery shop because they want to have extra leftover in this week’s grocery budget to spend next week on a toy.  They only want me to buy the bare bones to pack their lunches and they eat everything we pack instead of throwing away half of it.

They also know that baby brother needs diapers and wipes, the dogs need dry dog food and we need to plan our weekday dinners.  They really take their time to comb through my coupon binders to find coupons to help offset the out of pocket costs for these items and they highly encourage me to buy meats that are on sale this week at the store.

I really cannot stress to you how important and vital it is for you to get your kids involved and teach them to properly manage money.  They will learn by your example so make sure you set a good one for them to follow.  I meet people all the time who tell me that they remember their mothers using the envelope system to make ends meet and save money and now they use it too.

My yearly clothing budget

Our yearly clothing budget is $500, or $100 per person.  For each purchase that I make, I write down that person’s name and the dollar amount spent and deduct if from their $100 per year.  I realize this yearly amount may be unrealistic for some but I use the extra funds I talked about earlier to add to this fund all year long.  Remember my regular coupons in the mail, rebates and shopping apps?  Unexpected income like my husband’s overtime during the holidays and my super sporadic earnings from this blog’s affiliate programs goes towards this fund so that gives me a bit more throughout the year.

My yearly eyeglass budget

I also have an envelope for a yearly eyeglass budget.  Although this is not a yearly expense for each family member, we save for it every year because we get a new pair of eyewear on our “rotation year.”  Four out of our five members of the family need corrective lenses to see properly.  Instead of trying to buy all four of us new glasses, all at once, we decided to split it up into two pairs of glasses per year.  One child and one adult, per year helps keep the cost reasonable.

What about flexible spending accounts through employers? 

What is a flexible spending account?  It’s an account that allows you to use pre-tax dollars to pay for eligible healthcare or childcare costs covered in their strict guidelines.  Your employer deducts the amount you determine out of each paycheck and holds it in an account for you to spend throughout the year.  You are usually issued a debit card to make your purchases.  You end paying less in taxes because your federal taxes are calculated after they deduct this amount for you.

These are great if you absolutely positively know exactly how much you will spend to the penny per year on healthcare related costs or childcare costs that are covered by the program.  I used mine when I worked at a hospital for a couple of years and lost money each year because I never could manage to spend it all.  It’s a use it or lose it program with many stipulations and can be difficult to use.

The government has made changes that make it difficult to use on over the counter medications because you have to submit a doctor’s prescription along with the receipt, for each item, to get the reimbursement.  Band-aids, Tylenol and vitamins required a doctor’s prescription.  In my honest opinion, it’s a total pain in the ass but if it works for you, then by all means, work it to fit your budget and needs.

Extra fun money envelope and “Fun Money Jar”

The extra fun money envelope contains anything extra that we accumulate throughout the year.  This is where rebates, money leftover from our weekly budget, unexpected income such as overtime from my husband’s job or any unexpected income I generate from blogging come into play.  This will cover unplanned visits to the zoo, our local water park in the summer or it may even permit a trip to Sea World again this year.

The family has agreed that we cannot spend the money unless each and every one of us agrees on how and where to spend it and it’s for the entire family, not an individual.  See how I get out of being the bad guy again?  The kids realize that this is not for their toys or extras.

We have a large glass jar with a lid labeled “Fun Money Jar” that my family keeps for lose change.  My daughter is the world’s best collector of lose change when we go out.  She will look up and down and collect every penny she finds.  She also does the same around the house and she always reminds all of the family members to toss the change into the jar.

We have lovingly nicknamed her “the budget police” because when her older brother asks for something outside of the budget she quickly reminds him, “That’s not in our budget brother and I am the budget police – let’s find ways to fit it into our budget.”  It’s comical at times and it’s really funny when I see how annoyed he can get when she repeats it over and over again like annoying little sisters will do!

The fun money jar is really just an extension of the envelope but lose change in an envelope is a hassle and the jar teaches my kids the importance of learning delayed gratification.  They get motivated and excited when they see how fast it can start to fill up with just a few loose coins thrown in here and there.

They also love going to the coin counting machine and we play a game of trying to guess the exact final amount before the coin counter finishes.  We don’t pay a fee to use the machine since our bank owns it and we are account holders.  If it wasn’t free to use we would save that extra 3.5% and count and wrap our own coins.

Our yearly vacation budget

We have a yearly vacation budget and we hold a family meeting to decide how to spend it.  Since the kids are still young we present them with a few options but as they get older in a few years, we will encourage them to brainstorm creative ideas of where and what they would like to do with the family.  You can take very inexpensive family vacations by getting creative and making a few minor tweaks and using some resources you might not yet know about.  I will include ways to do this in the next post of this series.

Final Thoughts

No two budgets are created equal so I wanted to focus more on getting your Top Priority Pile on the budget first and then working your Secondary Priority Pile and extras into your envelopes.  Pay what you must first, then do your best to work and re-work with what’s left.  Using the envelope system keeps you from overspending as well as challenging you to constantly find creative ways to save more money.  It also gets you off the hook when your kids or spouse want extras not covered by the budget.

It’s normal and expected to work and re-work the figures every month because your initial figures may not suit your needs.  Or if you find you always have an extra $20 a week in your grocery budget then you can recalculate your budget and put that $20 to better use.

Since reviewing my budget for the past few months, my husband and I have realized we can actually afford to make weekly mortgage payments on our house instead of monthly payments.  If you understand the power of compounding then you realize that we will begin by saving pennies and those pennies turn into dollars quickly.  Paying weekly interest will save us so much money in the long run!  I haven’t quite calculated the exact savings yet but I will share all of that with you in my post Turn Pennies Into Dollars which will publish after I finish out the next two parts of this series.

Creative Financial Coaching Services

I am a Certified Professional Life Coach with over 20 years experience and I specialize in Creative Financial Coaching.  I can help you set up your budget and envelope system and give you one-on-one creative financial coaching to help you create disposable income without getting a second job.  Want to learn more about my coaching services?  Click here to read my service menu.

Step 3 – Creative Financing of The Total Budget Makeover Series will be full of free coaching solutions and creative ideas to help you save more money.

I go in depth about couponing and how it creates instant disposable income for your family.  I also show you how to take a “cheaper” family vacation that doesn’t skimp on the fun activities.

I share fun free things your kids can do all summer long to keep them busy and engaged as well as give you some ideas of inexpensive family fun events.  Did you know they can skate and bowl for free each week?

And let’s not forget how to dine out on a dime!  You can eat out more often if you learn a few frugal tweaks.

Learn how to shop for free or get paid to shop at your favorite retailers and see how living frugally is smart but NOT the same as being a total cheapskate!

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