It’s Friday night and you just got paid.  You’re getting yourself ready to go out with some friends and you walk past your stack of bills piled up from the last couple weeks.  Do you tear into them and pay them all now?  Nah, you can do it this weekend!  You’ll have plenty of time during the weekend!

Photo by pinprick

Fast forward to Monday morning.  Oh yeah!  Gotta pay the bills!  As you’re tearing into them with just minutes to go before you have to leave for work, you realize one of them was due THURSDAY.  Crrrraaap!  Now you remember that last time you convinced yourself that you’d look for that bill when it came in and pay it right away…but FORGOT TO DO IT!  Oh well, submit the payment that takes 3-4 days to get there and hope they process it before they impose a late fee on you.  (not a chance)

Any of this sound familiar?

There are many ways to pay your bills, many of which work well, and some that end up with scenarios like the one presented above.  The key is to find the one that works for you.  So what I’ve done is outline some of the different methods I’ve tried and explained the pros and cons of each so that you can find one that really helps you get in a groove of paying your bills on time.

Method 1 - Automate Everything

There’s a lot of tools out there at various banks that allow you to completely set up your bills to link up with your checking account.  This is possible with just about any bills I can think of with major corporations, and it’s possible to set up fixed-amount bills that are the same every month with anyone that has a billing address.  Some companies will even allow you to provide your bank information so they can just withdraw the due amounts instead of send a bill.

Method 2 - Pay Everything The Moment You Get It

Photo by Earl

Probably the easiest way to account for things is to just pay every bill the moment you get it.  When the envelope shows up, simply write a check that minute and put a stamp on the envelope.  (Or use your web bill pay system from the bank to arrange a payment immediately.)  Nothing will ever really be late if you’re paying everything the moment you get your statement from the company.

I think this may be one of the most difficult of the methods to follow because it takes the most discipline, but I also think it may be one of the most stress-free if you can manage to maintain a large enough account balance to pull it off.

Method 3 - Schedule Bill-Paying Sessions

Another method that I find to be the most common amongst the people I know is to schedule regular times every month or payday where all bills that are due get paid.  Different pay schedules will determine when you’re able to do this effectively, but there’s two variants that I’ve seen.

• Pay everything that you have in your stack of bills that’s due before the next payday.
• Pay everything that you have regardless of when it’s due.

If you’re on a bi-weekly pay schedule like me, then every payday you’d sit down and figure out what you need to pay to keep current.  The next payday you do the same thing.  If anything is due immediately after the next payday, you can just pay it now and make sure it’s not late.

What I Do

So which method do I use?  Well, I actually use a combination of methods 1 and 3.  Don’t forget that the above methods aren’t the ONLY methods!  There’s many variations in between them too.  I’ve automated all of my non-variable payments from my checking account web bill pay system.  For example: mortgage, student loan, credit cards, some utilities, etc.

Next, I’ve got my budget spreadsheet listing all of my bills due-dates in one column.  This is something I refer to as I’m planning which bills I need to pay every payday.  If the date falls within a pay-period, or even a few days afterward, I’ll make sure to pay it by the payday before that.  Aside from what goes in my envelope budget, I use this for everything that’s not automated.  For example: medical bills, electric bill, gas bill, annual bills, etc.

I find that the combination of automating things I know won’t change and scheduling everything else works best for me.  I only have to worry about the things that fluctuate from month to month, and I can work on minimizing those expenses where possible.

So what kind of system are you using?  Are you tired of paying late bills, or do you have a tried and true system you’re willing to share?  Let us know about it in the comments!

Earlier this week I showed you step by step how to create an envelope budget system.  One of the keys to a successful systems is being able to modify it knowing that it’s not going to be perfect on day one.  Today I’m going to walk you through a few things that you can do to make sure your envelope budget system continues to work for you through an ever-changing environment.

Keep Track of Unplanned Spending

Photo by cote

The first rule you must follow in order to manage your envelope budget system effectively is to make sure you gather the necessary data while you’re using it.  One very important piece of information is how much you actually spend.  I like to keep a spending log of all expenses that are unaccounted for in my budget.  This can be applied to the envelope budget system as well, since in order to make it work better for you next time, you should account for what you spent this time.

As you’re keeping track of these expenses, you should note whether or not it’s a one-time expense that you didn’t plan for, or if it’s something that you overlooked in your recurring budget.  If it’s something predictable that you can plan for in the future, let’s make sure we make a note of that for the next pay-period.

I try to keep track of my unplanned spending by filling up a list for a month or so…then clearing out the list after I’ve adapted my system to account for the expenses next time.

Adjust The Amounts

Ok, there’s two important things to look for in each category when you get to your next money-stuffing cycle.  (I do mine every 2 weeks, some people do their every month.) 

1. How much MORE you spend than what you had (if you had to),  or
2. How much you have left.

Now, adjusting the amounts of your envelopes is really a function of modifying your budget.  So, first and foremost you must make sure that you’re balancing your budget as well as part of this process.  You only have so much income, and it’s got to cover all of your expenses.  What we’re talking about doing here is just adjusting the amounts between the envelopes that you ACTUALLY have room for in your budget.

The idea here is to simply go down the spending log that you created for this entire budget cycle and change the amounts accordingly.  There’s some rules to follow here:

Photo by drocksays

1. If you went over and have to raise the amount on a category/envelope, then you have to take that money out of something else.  That something else can be another envelope that you reduce the amount on going forward, or it can be an adjustment in your overall budget to use more for the envelope system.
2. If you have money left over, stop and think about the expenses in that category.  Were they accounting for expenses that aren’t regular and require you to build up a balance within the envelope?  Must you save up enough to pay for one big bill at the end of the year with the money in that envelope?  If so leave it alone.  Otherwise, you can consider lowering the amount and using that money somewhere else.
3. Don’t stress about getting the PERFECT amount this time just as it didn’t have to be perfect the first time!  This is a cycle.  We’re going to continue to change it over time, not all at once…right now.

Follow these rules and you should manage to end up with a pretty ideal set of amounts after a few cycles.  We’ve actually been able to find places where we realized we could cut back pretty easily after watching the amounts and thinking through them more carefully from month to month.

How To Overcome Miscalculations During a Pay-period

Photo by amypalko

Analyzing everything in retrospect is easy enough, but what about those times where you’re just out of money in a category before it’s time to put more money in it?  Well, I’ve got a couple of suggestions for how to do this that we’ve tried.  I think they both work pretty well, but after trying both we liked one better than the other.

The first method that we tried initially is to create a short-term ‘Miscellaneous’ category.  We tried putting lower, barely-get-by amounts in each category, then putting some money in the misc category that could be utilized as the overflow in case we went over in any other category.  This was helpful at first because we weren’t sure how much money we were going to use in some of them.  It got so small after a couple iterations that we just wanted to get rid of it.

Another method that we’ve now been using that we like so far is to just start each category with slightly higher amounts than we think we’ll use.  If we end up going over in any category, we’ll either use some of the unused portions of other categories, or dive into the emergency fund to make up the difference until we can replace it the next pay-period.  It really depends on the reason for going over budget and how much it’ll cost.

Either of these methods is fine, but the biggest catch-all method is to use the emergency fund for any oversights every time and replenish it at the next payday.  However, we’re trying to avoid that at all costs and still manage to run an envelope budget system as close to our budget as possible.

The key with this system, as with your overall budget, is to stay flexible.  It is possible to be super-strict with your habits and learning to only spend within your budget using a defined envelope system, but learn to keep the flexibility in the system…not in the spending behavior.

I’ve armed you with enough material to get your own envelope budgeting system started, and enough to help you keep it going through the changes in your budget over time.  As always, I welcome any tips or suggestions any of you have that could be applied to evolving your envelope budgeting system.  Share them with the rest of us in the comments!

Earlier this week I talked about how we have been successfully using an envelope budgeting system for over a month now.  We identified some things that we spent outside the budget, but for the most part we did pretty well staying on track.  Well, I believe so much in this approach to help people get on track with a budget that I’m now going to share exactly how we came up with our system so you can make one too!

Photo by DarkYES

Be Flexible

One thing to keep in mind when creating any budget is to know that it will not be perfect on the first draft.  In fact, it probably won’t be perfect on the second or third either.  It takes time and many iterations to get to the point where your budget actually meets your planned expenses simply because things change too much.  If we all lived in a perfectly predictable world, budgeting wouldn’t even be necessary for anyone.

Choosing Categories

When we first started with our budget, we realized just how many categories there could possibly be.  Our first list consisted of just 5 categories, and then our second list had over 40 categories.  This was all before we’d even STARTED using them!  Believe it or not, I don’t really think it matters if you want to use a general set of envelopes or a really detailed set.  What really matters is how much time and effort you want to spend keeping track of each and every one.

Photo by drhunter

One key here is to only include categories for things that you can’t pay online or through an invoice or bill.  Things like mortgage, car payments, utilities, credit card bills, etc. aren’t good candidates for cash envelopes.  You should be paying these bills online or by writing checks for the bills as they come in.  The envelopes are for expenses that actually MAKE SENSE to use cash for.  Anything that doesn’t come as a bill in the mail is probably a good candidate for cash.  Again, it’s all about how much time and effort you want to put into it.

How did we decide to do it?  Well, after looking at that big list of 40 envelopes to make, we realized that a lot of them were related.  In fact, MOST of them were going to be purchased at the same store in one trip.  Can you imagine being at a checkout counter and having to gather up 10 envelopes worth of money and only take the right amount from each one while making people wait in line?  Well my wife sure as hell couldn’t either.  LOL!  This system has to be convenient folks, or you’re going to end up not using it at all.

We took our big list of categories and started combining them not only based on how they related by items, but also based on where we normally purchased them.  For example, we have one single envelope for ‘Groceries’.  This envelope used to be SEVEN envelopes including food, pet foot, baby supplies, toiletries, cleaning supplies, gardening, and medicine (over the counter).  Well, we get all that stuff at the SAME PLACE.  Even if we shopped at 3 stores for all of that stuff, it’s very easy to get any combination of those categories at any one store.  It just makes sense for us to have one budget for an all-encompassing ‘Groceries’ category than to mess with balancing all those other groups.

In the end, we took all of our categories and combined them into the following list (needs in bold) and labeled envelopes for each category:

Calculate Amounts

This is probably the most difficult part of the entire project.  People try to get the most perfect number when doing this.  If you’re sharing your budget with someone else, then it gets REALLY hard.  This is where you find out what’s important to who, and where you’re willing to give up one thing for another.  I’m not going to go into the details of how to pick your numbers here, because "how to calculate budget amounts" is probably a whole book…not a paragraph in an envelope budgeting article.

We started with our current budget.  We’ve been iterating over this budget for a number of months now, and it’s getting closer to what we actually spend each time we look at it.  We simply combined some of the categories on the budget to match our new envelope system and added up the numbers for each new category.  Once there, we knew how much to put in each one.

Now I’m not one to advertise to the world how much money I put in each category, so I didn’t want to put my amounts on the envelope with the label.  I look at the spreadsheets often enough to know what the amounts are and use that to keep track of everything.  However, a nice little tip for those of you that like to forget how much you get each month in your envelopes could consider writing down the number inside the envelope so you can remember when you’re out and about.

Keep Track of Envelope "Deposits"

After using the envelopes a little while, I realized that there was really no way for me to know for sure exactly which ones I’d already filled and when.  There’s a number of different ways to keep track of this, and I actually do a couple of things.

One way, is to keep track in your budget spreadsheet.  I turn all text in my budget spreadsheet blue once I’ve paid that amount to whatever bill, expense, or envelope "deposit" that requires my money.  Since my budget has a column for every single pay-period (I don’t budget from month to month, I base everything off of our 2-week pay-periods) I can keep track of when I paid each expense on its own pay-period.  So when I take the money to put it in the envelopes, I change the text in the spreadsheet to be blue for each category.

Another way to keep track of when I put money in the envelopes is to keep a list of the dates that I’ve already made a "deposit" on the envelope itself.  I just made a few months worth of paydays along the bottom, and we cross them out when we put money in.  This way, when I’m in the store thinking "oh man, I’m not going to have enough for everything I wanted" I can look at the date and see how close I am to the next "deposit" and plan around it.  I’ve found this very helpful for my wife to keep track of how much we have to spend and more importantly, when we have it to spend.  She doesn’t like looking at spreadsheets all that much, but having the amounts IN the envelope and the dates ON the envelope, she can get an idea of what to plan around as well without actually going down to the computer.

Fill The Envelopes With Cash

Now for the fun part! :D  Whether you do your budget monthly or bi-weekly, the most exciting time around here for us is actually putting money in the envelopes.  Each pay-period, we stop by the bank and withdraw all the money needed to fill all the envelopes.  Having that cash in hand is such a strange feeling after having just used plastic for everything all the time.  It’s actually a lot of fun knowing that we’re going to only spend what we just took out, like a big oversized monopoly game or something.

That evening we sit down and fill the envelopes, check everything against the spreadsheet to make sure we have everything in order.  Update our blue text and cross out our dates…then we’re on our way until the next payday!

I hope those of you interested in making a budget system are able to do something very similar to get started.  Most of the hesitation in creating a system like this came from the fact that we thought we had to have everything perfect right away.  That is NOT THE CASE!!!  It won’t be perfect the first time.  You have to modify it over time to fit your actual needs!

So with this week’s theme that started with OUR successful envelope budgeting, I’ll continue to HELP YOU with envelope budgeting by showing you exactly how to modify your system over time in an upcoming post.

As always, I welcome any tips that any of you would like to add.  I also love hearing your stories and opinions, so jump in and let us know how you’re doing with your envelope budget system!

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!

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.

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.