Archive for December 2010

What is and how to set up ‘Envelope Budgeting’

Once you have setup your budget, the next step is to physically organize your money. That is, where you will keep it and allocate it to different items in your budget.

We call it ‘Envelope Budgeting’ because you will normally use an envelope or some sort of a folder to store your money and organize it. The most ironic thing about this concept is that I was using it long before I knew it existed, until I read about it one day and realized that it actually exists as a concept in budgeting.

You will want to keep money for certain items in your bank ( mainly those fixed items that are withdrawn on a monthly basis) and withdraw the rest.

Once you have all your money in the envelope, start allocating it to different items in your budget. Use a large tag to label each item and enclose the money within the tag. Of course, the money you allocate to each item is already specified in your budget that you would have created here.

From here on, when you need money for grocery shopping, you take it from the money allocated for it in your envelope. The same for gas purchases and so on.

Once you get comfortable with this type of budget arrangement, you will appreciate the ease and the fact that you will never have to overspend on certain items and have no money left for others. Each item now has its own allotment and room, and there is no more risk of one jumping into the territory of the other (using gas money for example, to pay for dinning out)

Ever since I set up my Excel sheet budget and this envelope budgeting to help organize it physically, my finances have changed tremendously for the better. Although I generally still make the same money, it has become so much easier to spend and save. It is as if I have found or added a new source of income. It is all about budgeting and organizing your money.

If you don’t like paying by cash and prefer to use debt instead, then this whole concept of ‘Envelope Budgeting’ will no longer apply. This is not to suggest it is not doable by keeping your money in the bank, but it will be harder. Think about it: all the money will be pooled together and it will just be harder to separate than if you were to do it in an envelope with each having its own room and tag. Wouldn’t it be nice if banks introduced some form of ‘Envelope Budgeting’ too?

Remember the saying ‘if you fail to plan, you plan to fail,’ so get going and start budgeting your money.

Creating your First Personal Budget, Step by Step

With our website being focused primarily on finance and budgeting, we thought it is only logical that we make one of our first articles about budgeting.  More specifically, how to create a budget, for those who have never created one.

You can do the budget either on a piece of paper, or on the computer using Excel or other spreadsheet programs. But using Excel or a similar computer program, it would make things so much easier, as you are able to change numbers with ease.  A paper-based budget would make things very hard to change and calculate.

1st step: Decide on your budget cycle

Do you get paid every two weeks, as most people do? do you get paid once a month? or maybe every 1st and 15th of the month?A cycle is how often you get paid.  Depending on how you get paid, that is how you will divide your budget cycle. So if you get paid every two weeks, you could divide your budget in two sections, with the first section getting the first pay and the second getting the other one.   Or , you can simplify it and make one monthly budget cycle.

2nd step: Mark down all your fixed expenses

Jot down all your weekly or monthly expenses, including utilities, GYM membership, car bills etc. Beside each item, include the monthly amount.

3rd step: Write your variable expenses and how much to allocate

These could include any item that changes, like personal spending, gas, grocery shopping etc. And more importantly, once you decide what your variable expenses are, decide how much money to allocate to each. Since these are not fixed items and can change, you will have to do your best to approximate the totals. For example, assuming your budget cycle is bi-weekly, you will have to decide-based on prior experience and spending-how much money you need to allocate for gas. Of course, these numbers can always change as you go.

4th step: Deduction for Savings

Saving money is so important, I have dedicated a special step for it. Remember, ‘Pay yourself first!’ Create a category in your budget and call it ‘Savings.’   Decide how much you would like to save from every cycle, or on a monthly basis.

5th step: Calculate all your ‘After-tax’ earnings

How much do you make from work and other sources? include it all, after taxes. If your pay is variable or depends on commissions, you will have to do your best effort to come up with a close figure of what your ‘net income’ is.

6th step: Put it all together

Start inputting all the numbers together, with a description beside each one. Put all the expenses on top of one another. Below all the expenses, input your ‘net income’ and subtract the ‘expenses’ from ‘net income’ like this

-Expense 1
-Expense 2
-Expense 3
-Total Expenses =

-Net Income =

(Net Income – Total Expenses)  = Leftover (Positive or Negative?)

That is it!

If after you subtract your total expenses (fixed and variables) from your net income, and you still end up with some money, congratulations, your budget is efficient enough to produce extra leftover money. In fact, if you have extra money, you could create another cell just below everything else and call it ‘Leftover’ If you have leftover money from your budget cycle, you can either roll it over to the next cycle and allocate it to your ‘Savings’, ‘personal spending’ or any other category that needs some funds.

On the other hand, if subtracting your expenses from your net income puts you in the negative, you will have to go back to your budget and revise the numbers. Obviously, you will not be able to touch your fixed expenses, since these are mandatory and can’t be changed. Instead, look at your variable expenses such as your ‘grocery shopping’, ‘personal spending’, ‘gas’ etc. Naturally, you will draw money from a variable expense that is flexible enough to reallocate to something else and bring your budget leftover to above zero.

This is why Excel or a spreadsheet is much easier, as it enables you to do these number manipulations and ‘What if’ scenarios much easier and faster.

Change and revise as you go

These numbers-except for the fixed items-will not stay the same. In fact, your very first budget is a mere blueprint. A fill-in-the-blank template for what should go on the budget, with the numbers to be filled out or revised later. In my own budget, I tend to review and revise my budget every 3-6 months, or whenever I have new sources of income, a salary increase etc.  The key priorities are to pay your fixed items first and allocating money for your savings.  It is also a good idea to create another item in your budget for ‘Emergency’, where it would be different from your ‘Savings.’ Use money from this ‘Emergency’ fund to pay for unexpected necessity such as house or car repairs,  random infrequent bills etc.

Coming up in the future, we will expand on the topic of creating and revising your budget, and how to set up ‘Envelope Budgeting’

Diversifying your Places of Savings will Maximize your Future Wealth

Putting your money in a savings account is not the only way to save and grow your money. It is just one of many. Generally speaking, and based on my own personal experience, the more sources of savings you have, the more money you can save. In other words, don’t put all your eggs in one basket. Find alternative ways to save money. Here are some of them, most of which I have tried myself:

-High interest savings account: whether it is at ING, Ally or your local bank, this is a must for all people looking to save their money. Don’t worry about interest rates being at historical lows. They are going up and will continue to. You are not just putting your money there to gain interest. You are also leaving it there so that it is not within your reach, where you could end up spending it.

-Piggy Bank: we already went in-depth about how to save money using a piggy bank.  Where your savings account will hold big amounts, use this one to save your loose change (and some small bills occasionally)

-Automatic Payroll Deduction: This is one of my favorite and easiest ways to save. You don’t even see the money and it goes straight to your saving account.

-RRSP: for Canadians, it is highly recommended that they open an RRSP account to compliment their existing savings account. You can use automatic payroll deduction at your company (see note above) to take advantage of this.

Of course, you can choose to go more advanced and start investing your money, buying stocks, currency etc. but that is beyond the scope of this blog for the time being.

Having more than one place to save your money will not only get you more money, it will just give you a feeling of having more money, and this in turn will encourage you to want to save more money.