It’s been about 5-6 weeks since I set up a bunch of my bills on an automatic payment schedule.  For the longest time, I was simply sitting down every payday and running through what bills I could pay.  The system was totally prone to late payments and additional fees.  I still log on every couple of days and check accounts across the board, but it’s so nice to get statements in the mail only to check the account and see that a payment is already scheduled for it.  I have the budget buffer concept to thank for this.  Without it I’d still be living paycheck to paycheck.

The only real work that I’ve got now as far as writing bills is to watch the medical statements (we got an awful lot of those, maybe 5-6 per month from the various doctors/clinics) and make sure they get paid.  I’m horrible about getting them mixed up and thinking I paid them all when I actually missed one.

Even though it’s all automated, I’m still highlighting my numbers in blue on my budget spreadsheet every time I make a payment or see an automatic one go through.  I like to see my entire column turn blue before the next pay-period or I get nervous.

I’ll be providing daily progress numbers again soon now that we’re finally getting comfortable with our envelope budgeting system.  For the most part, we’ve only paid minimums and applied the rest toward our account…so not much for debt reduction the last week.

Looks like we’ve been using the envelope system for just about a month now.  I must admit that so far it’s working out quite nicely for us.  We’ve had a few one-time expenses that weren’t part of our categories, but I still had a couple hundred dollars from our tax refund that hasn’t been applied to anything yet so we just used it from there.  It will be important to account for stuff like this in the future though, or else we may have to go without on something.

Current Envelopes

Here’s our current envelope breakdown (needs in bold):

Photo by amypalko

1. Groceries
2. Automotive
3. Clothes
4. Health/Hygiene
5. Medical
6. Extra Curricular
7. Gifts
8. Pictures/Crafts

Unaccounted Expenses

Here’s a breakdown of what we had to spend money on that wasn’t accounted for in our system:

1. Camping equipment for 1st time backpacking trip for scouts.  ~$50
2. Vet bills for dog.  ~$100
3. ER visit bill I forgot about from last month.  ~$90

The camping stuff is completely reusable for future trips and for even the younger boys when they get old enough, so I don’t have a lot of issues with that.  I think we need to work out more effort on the fund-raisers for them in the future though.  I’m not spending out of pocket for all the stuff we need every year, and the extra-curricular envelope only covers annual dues.

The vet bill is a once-a-year kind of deal, and we’ll be adding another envelope for animals to account for this next time.  I have no idea why I forgot it in the first place, our pets have always been a small expense in our past budget attempts.  We just include pet foot as part of our grocery budget, so totally slipped on this one.

The ER costs I’ll get reimbursed from my flex spending account at work, so that doesn’t concern me much that we didn’t have enough built up in our envelope for that.

How We Measured Up

So it may seem like we’ve completely blown our envelope system with these, but I still consider it a very successful month.  The rest of the categories we’ve managed to stay within budget or even under budget.  The first few months are always the hardest, so we’ll keep at it and see how well we do next month!

Since this has been quite a success for us for budgeting our cash-flow expenses (i.e. stuff that doesn’t show up in monthly bills like mortgage, utilities, debts, etc.) the last month, I’m going to spend the rest of the week demonstrating how we created our envelope budget system and show exactly how we’re going to modify it as we find expenses we didn’t account for…or find that we’re not using everything in each category.

So stick around, subscribe to my RSS feed/email updates,  and see how we’ve done it!

Update: Check out the follow-up posts on How to Create an Envelope Budget System and How to Evolve an Envelope Budget System!

Holy cow, I won something!  Earlier in the week I participated in a credit card cutting contest and I got second prize!  Woohoo!  *backflips* (ok, not really…I’ll break something)

Check out the post over at The Penny Saved to see the announcement with my picture there.  Some of the other entries look pretty impressive.  Too bad there were only 17 of the 30 participants required to allow for the iPods to be given away.  I think I would have gotten the black one had there been enough participants.  I’m still happy with the results winning a few ebooks and some advertising space on the site.  I’ve jumped into dozens of online contests and just never won anything, this is NEAT-O! 

Earlier this week I talked about some disadvantages of living from check to check that I’d realized over the last ten years of never being ahead.  I mentioned that I’d share with everyone exactly how I managed to stop living only two weeks at a time…every pay-period…with little to no progress for the last decade.

This isn’t rocket science folks.  It’s almost as simple as the "spend less than you earn" phrase.  The hardest part is actually getting enough ahead of yourself and then staying there.  I know, easier said than done right?  We’ll let’s break down the exact steps I took and see where we end up.  (I rounded numbers occasionally to make things simple for the example, but I did do these steps.)

Know Your Income and Expenses

Ok, before we can solve any problem we have to know exactly what the problem is.  We need to know all of the problem though, not just the gist of it.  We need to define each and every piece of it so that we can make sure we have a solution that works with each and every piece of it.

So let’s define our problem…how about we start with something we’ve all probably heard before: 

"I never seem to have enough money when it’s time to pay bills.  Every time we get our paycheck, it all disappears right away without having anything left.  Sometimes it’s not even enough to pay what’s due!"

I see that statement, and I see a couple things pop out.   Bills and paycheck…i.e. expenses and income.  What are they?  Do you know them all off the top of your head?  Do they change from month to month?  If not, get a budget going.  If you have a budget already and you don’t know this…perhaps you should look at it more.

So now that we have some data, let’s change our problem into something more quantifiable using them:

"I make $5000 a month, and my expenses are roughly $4500 a month.  I should have another $500 afterward, but I don’t!"

This is typical of people that live paycheck to paycheck.  That extra $500 "disappears" during the pay-period you got it, and you don’t know where it went.  Even worse, sometimes you don’t have enough to pay the $2500 in expenses when you need to.

One thing we need to do is to make sure the problem is addressed.  However, there’s a number of things we need to do in order to accomplish that.

Balance Your Budget

Photo by markdrasutis

This may sound like a huge amount of work, but too bad.  It’s GOTTA get done.  This can be simple, or it can be hard…but basically you need to just make sure your expenses aren’t more than your income.  You have to be honest with yourself.  The only person you screw over if this step isn’t done truthfully is yourself, well and maybe your family and possibly your friends…  Ok, geez, you HAVE TO DO THIS.  If anything, at least know ballpark figures.

$5000 is more than $4500.   Check.

Verified that $4500 is REALLY what I will spend in a month.  Check.

See my budget page for more details.  I rounded off here for simplicity.

Apply a Budget Buffer

Basically what we need to do next, now that we know we’ll be spending less than we make, is to place a budget buffer in our account.  This is crucial to allowing you to stay ahead of your bills enough to NOT fall back to the paycheck to paycheck routine.  This is probably the most difficult part of the entire plan.  Basically, you need to have an amount in your account that can ALWAYS cover the next month’s expenses not including the last paycheck in the month.  In other words, you’re going to live on last month’s income.

Will it be easy to save up enough money in your account to do this?  Probably not, but it’s definitely worth having it once you manage to do it. 

I used money from this year’s tax refund to finally put this in place for us.  My budget buffer is about $2000. 

When I finally calculated this, I made that the amount of my emergency fund as well.

The budget buffer is NOT the same as the emergency fund!  Do not get these confused, as you may need to dip into your emergency fund while your account balance is low during the month!

Recalculate and Repeat

Things change every month.  Trust me…I know.  A family of 8 has its fair share of chaos.  So make sure to account for upcoming changes in your income or expenses.  Like I said, the hard part was GETTING the budget buffer in place.  Now all you have to do is make sure it stays there by not spending it.  Each month is an entirely new effort.  It’s just like a credit card, you can spend that amount SOOO fast, but putting it back can take months!

Photo by jovike

So recalculate your income and expenses each month and make sure your budget buffer is lined up with your paydays before next month.

This repetitive cycle is what will allow you to stop living paycheck to paycheck.  So long as you always know your income and expenses, and you know the minimum amount to maintain in your account during the month, then you should never have a problem being able to pay your regular bills.

Now if some kind of emergency comes up…well that’s what the emergency fund is for!  Obviously you gotta do what you gotta do sometimes, but I can’t emphasize enough how much NOT living paycheck to paycheck is changing our financial situation and confidence.

• NO MORE LATE BILLS!
• NO MORE LATE FEES!
• LESS STRESS!
• CONFIDENCE!
• MOTIVATION!

So, that’s basically what I did to break my never-ending cycle of late bills.  Granted, we had to wait until getting our tax refund to finally get it started.  But here we are 3 pay-periods later and things are still right on track!  It was so worth it to put a system in place that we could really follow.  (Technically, my emergency fund is acting as my budget buffer temporarily until we fully fund both balances, but we’ll have that done by next month.)

So if you’ve not broken the mold, what are you waiting for?  What other methods have you used to get out of the check to check rut?  I’d love to hear how you’re dealing with this type of situation, or what other struggles you’re having trying to get through it.

Well, I’ve managed to knock off a few more thing from my to-do list.  I’m still trying to find a balance of time where I can apply myself equally toward development on my websites and writing time keeping everyone up with our daily activity.  On the bright side, I’m balancing the act a little better as time goes on.

As for spending, well, we’ve managed to go this entire pay-period without spending beyond what was in our envelopes.  Granted, we had to shuffle some funds around and "borrow" from one envelope to the other, but I suppose that’s to be expected until we figure out the ideal amounts for each one.

Now that we’re comfortable with the whole envelope system plan and everyone is on board with it, I’m going to start the journal regularly again with this week’s payday-filling session tomorrow. 

Also, if you haven’t already noticed, the daily journal posts are running through an entirely different RSS feed from this point forward.  Sorry if that inconveniences some of you, but I really like having the separate sites for this.  It’s what I wanted to begin with, but a friend convinced me that I could run them both from the same site and separate them completely so here we are! 

One of the biggest struggles I’ve had over the years with having a semi-budgeted environment was that I never seemed to have enough money in my account to be able to pay every bill that was due.  Well, I’ve defined a very simple way to avoid this scenario once and for all.  I’ve applied a "budget buffer" to my account.

Budget Buffer - the amount that you always want to have in your account the moment your last regular paycheck of the month is deposited.

Calculating Your Budget Buffer

The first thing we need to do is find our total monthly expenses.  If you’ve got a budget already set up, great!  You already know this number.  If you don’t have a budget, I suggest you start with creating one so you can systematically examine every outgoing expense tied to your money.  If you don’t know where to start try taking a look at my budget page or check out Being Frugal: How to Make a Budget that Works.)

Photo by temptingmama

Once you’ve got your list of all outgoing expenses add them up for one month and you’ve got your total monthly expenses.  Write down that number.  We’ll need it soon.

Next, we need to define your regular paycheck amount.  For salaried folks, this is easy.  For hourly employees and those with irregular incomes, you’re going to have to make a best guess here and depend on a larger emergency fund to help in slow months.  All we need is the amount of your paycheck.  Weekly, bi-weekly, semi-monthly…doesn’t matter.

Finally, we just take the total for your monthly outgoing expenses that we’ve already calculated and subtract the amount of your regular paycheck from it.  The Budget Buffer amount is the difference between your total monthly outgoing expenses and your regular paycheck amount. 

For example, if you’re monthly expenses are $3000 and your regular paycheck amount is $2000 every two weeks, then your budget buffer is calculated to be $3000 - $2000 = $1000.

Applying the Budget Buffer

Now that we’ve defined what your budget buffer is, it’s time to do something with it.  The main objective in my approach is to make sure that your bank account has a balance greater than or equal to the budget buffer at the same time you get your last paycheck for the month.

We want to keep this as simple as possible, so no matter what happens do NOT let your account balance end up at less than your buffer during that last payday.  You want to ensure that you have the full amount of all expected expenses for the next month before that month actually starts.

Did you catch that?  For the month of April, if your budget is $3000 a month, you’d better have at least $3000 in your account during your last payday in May or you might not be able to pay all your bills!  If you’ve got your budget buffer in place before that last payday even shows up, you’ve got it made.

Why use the Budget Buffer?

So you may ask, "What’s the point?  Can’t you just make sure you have next month’s budget at the end of each month?"  The simple answer is YES.  However, if it were just that simple, the last couple times I’ve tried to do that it might have worked for me.  I don’t find it a mathematical complication more than I find it a behavioral one.

Most people have two paychecks per month for most months in a year.  (I know there’s a couple extras in there.)  Budgets tend to work on a monthly basis.  Many people I’ve known, including myself, would sit down once a month and figure out all the bill amounts and just start writing checks.  This would be fine for the one pay-period during the month when you did your bills.  However, that second pay-period was often treated as "extra" money once the bills were paid without considering when the next pay-period would fall during the following month.  This scenario opened the door for some unavoidable late payments because the money was not there until the first paycheck of the next month showed up.

For everyone mumbling something about self-control and stupidity, please have a little compassion for the people that struggle to focus on their budgets on a regular basis.  Obviously looking at things monthly doesn’t work for some people and they need something to measure up against during the "second payday" of the month…the budget buffer can be just that.  It’s worked for me so far, and if that’s the case I know it can help someone else too.

Example Scenario

Share the Understanding

Really, just how far off is this from a scenario you’ve experienced?  I’ve lived this a dozen times the last few years before really making some personal changes.  One thing that really helped me explain to my wife how much we could really spend between steps 3 and 4 in the example was the budget buffer:

"If we don’t go below $1000 in the account before next payday, we’ll have exactly what we need for next month."

"But if we have to we can spend the rest?"

"Yes, if we must…but we CAN’T make it next month if we do more than that."

If the budget buffer is applied to the account in step 3, the balance would have never gotten below $1000 before getting paid on March 28.  The new clothes and trips would have had to wait.  The eating out and drinks would have been pasta with water.  And everyone knew where to draw the line in the middle of the month because we had an exact number that we couldn’t let the account balance fall below.

Personally, I’d have rather applied that extra $200 in the budget toward debt and maybe snowflake a few more bucks out of the budget for the month, but as you can see with the above scenario…the negative effects can grow exponentially out of budgeting control.

So give the budget buffer a try, and I assure you…the money will more likely be there the next month when you most need it.