By having a plan, you can pay off your house (and everything else) early.

“It seems like we will be making house payments forever. We owe $140,000 at 6% interest and are paying $1000 a month. How much sooner could we pay it off if we started paying an extra $100 a month?”

The above is a hypothetical question, but it could be you. There are two answers: the quick one and the “dig deeper” one. By clicking a few buttons on a financial calculator we discover the quick answer is 21 months; paying an extra $100 will reduce the payoff from 20 years to 18 years and 3 months.

COULD you pay off your house early? Sure. But SHOULD you?

Let’s dig deeper. Do you have other debt? Do you have any savings? Do you have an emergency fund? Are you on target with your retirement investments? Do you have children who will need some help with college funding?

Being as this is a hypothetical case, let’s say you are paying $300 a month at 12% APR on $5,000 on credit card debt and $500 a month at 8% on an $8,000 car loan. You have $2,000 in a savings account, nothing set aside for emergencies, you are on target with retirement investments and you have two children, ages 4 and 8. Your challenges are to not only get your house paid off, but also get out of debt, build an emergency fund and make plans for your children’s education. Don’t get overwhelmed. You can accomplish all of these and still pay your house off early by setting priorities and taking things one step at a time. Let’s develop a plan.

Clearly Communicated Budget

Yes, the dreaded “B” word…you knew it was coming. But until you are in control of your money, you simply cannot develop any type of a plan. It is essential that you and your spouse communicate openly while developing this budget. Discuss hubby’s dream bass boat and your dream kitchen. Leave nothing out now because it will surface later. Let’s assume you two worked together and decided that by eating out less, simplifying your vacations, getting a smaller tax refund and cutting back on Christmas spending, you find $500 a month positive cash flow.

Small Emergency Fund

Life happens, so you need a small emergency “buffer” fund. Simply label that savings account as an emergency fund and agree not to touch it for anything except emergencies. Voila! Your small emergency fund is complete.

Get Rid of Credit Card and Car Debt

We will come to paying your house off early in a minute, but let’s first free up more cash flow by attacking your credit card debt and car debt in that order. Keep making your regular car payment while bumping up your credit card payments to $800 a month (the $300 you were already paying plus the $500 you found in your budget). In seven months, when your credit card debt is gone, add the $800 you were paying on the credit card to the $500 you are paying on your car. With new payments of $1,300 a month on a car debt (now down to $4,800), it will be gone in about four more months. Are you still with me? You have just paid off your credit card debt and car loan in only eleven months. By doing so, you have bumped your cash flow from $500 a month to $1,300 a month. Congratulations!

Time for a Big Emergency Fund

Grandma called it her “rainy day fund” for good reason: rainy days come. A big emergency is a higher priority than paying off your house early because when emergencies come, you need readily accessible funds. More equity in your house would not help if you lose your job tomorrow. Depending on your number of income streams and volatility of your job, you need at least three months of expenses; many financial planners recommend six months and some nine months. Let’s assume your expenses are $3500 a month and go for a six month emergency fund. Your goal therefore is $21,000, so you need to save $19,000 to add to the $2,000 you already have. At $1,300 a month, you will need at least 15 months to achieve this goal. After only 26 months, you have paid off $13,000 in debt and saved another $19,000. You are on fire!

Retirement

You said that your retirement was on track, so I am taking you at your word. If it wasn’t, you should be investing enough of this $1,300 cash flow each month to bring your retirement investment level up to 15% of your take home pay.

Kid’s College

Your two children are now 6 and 10. You could start making huge house payments now, but, because that added home equity cannot be easily converted to cash, college funding becomes a higher priority. For sake of discussion, you could achieve a $40,000 nest egg for each of them at age 18 if, assuming an 8% return, you start investing $300 a month for the oldest and $220 a month for the youngest. Check into a 529 plan to get some great tax breaks.

Finally! Pay the House Off Early!

You have been making $1,000 a month house payments all along, lowering your mortgage balance to about $132,000. Your monthly cash flow is now $780 a month ($1,300 a month less your college investments of $520 a month). If you decided to use all of the $780 to pay extra on your house, it would be paid off in only 7 years and 9 months – a total of 9 years and 11 months from the time you started your plan. At that time your payoff schedule was 20 years. You are awesome!

Summary

Our hypothetical family was able to pay off $13,000 in debt, save for a $21,000 emergency fund, plan for their kids’ college and pay their house off 10 years early. How did they do it? By creating a budget, sacrificing and developing a plan. I have a hunch that if you follow their lead, you would also see amazing results.

Note: I wrote this post originally for Christian PF.

photo credit: The-Lane-Team

Readers:  Have you paid off your house early?  What tips do you have for others considering it?

Share the fun.

Rent a condo or a house and divide the cost with two, three or four families. Make sure that you have plenty of room (a separate bed and bath for each family) and count the savings. For the past few years, my wife and I have shared a huge log mansion (this link is the exact home we stayed in) with three other couples for fall getaways. Cost per night? $300 total…$75 per couple.

Save on meals.

Eating out is, for many, the biggest vacation money drain. A family of four could easily spend $120 or more a day in restaurants. But if you could cook your own meals (another reason to rent the condo or house), you are basically getting free food. Why? Because you buy those same groceries whether you are at home or on vacation. Our four couples take turns cooking supper, have lots of fun sharing the meal together and always have plenty of leftovers for lunch the next day. Do we eat out at all? Sure, but we afford it by using our entire monthly eating out budget during our one week of vacation…again sort of like free food.

Choose off season

An ocean vacation is off-season starting in the fall; a mountain vacation is normally off-season in the summer. Check and compare. Some off-season prices are discounted by as much as 50%.

Save on gasoline.

I realize that sharing a vehicle is not convenient when each family has children, but it is worth considering. We normally share with another couple, cutting our gasoline expenses in half.

Plan your shopping

You ARE going to shop. Right? Then take advantage of your shopping time by purchasing Christmas and Birthday gifts. This is money you would spend anyway, so plan your list and have fun! In the same way, you can buy clothing from money you already had budgeted for clothing. Last year Jan handed me $40 from our Clothing envelope and ordered me to buy some slacks. Using price and comfort as my criteria (style is not on my radar), I was able to find both jeans and cargo pants for under $40. My point? I used our clothing money to make my purchase; no vacation money was required.

Our $500 vacation

We (with three other couples) already have our lodge reserved for a Smoky Mountain getaway this fall. Here is the tabulation:

• Room: 4 nights at $75 a night = $300

• Food: We will use our normal grocery and eating out money. Vacation expense = $0

• Gasoline: 800 miles round trip at 20 MPG @ $3/gallon divided by two families = $60

• Shopping: Using budgeted Christmas, Gift and Clothing money, vacation expense = $0.

• Total cost = $360

OK, I know I said we were going to have a $500 vacation. We might just go crazy, live it up and spend another $140. After all, we ARE on vacation!

Readers: In what ways have you made your vacations more affordable?  Which one tip would you share with us?

Me and my "bargain" Airstream

Many of you will remember reading about the Airstream camper my wife and I purchased last fall. Previous posts of this ongoing saga are Airstream and Irvin, a Nostalgic Adventure,  Airstream Update: Did We Create a Monster? , and Update on Airstream – Not Good News.

First a quick summary.

Janice and I made a purchase that we didn’t really want, but still thought would be good for our family. Our kids (all grown) had been gently coaxing us to get a camper so they could rekindle their childhood memories of camping time with Janice’s parents. Good sense eventually gave way to nostalgia when a vintage (fancy word for “old”) Airstream became available for a very low price. Janice’s dad Irvin, who passed away about 20 years ago, had always dreamed of owning an Airstream.

“We could buy it in honor of Irvin,” we said. “He would be so proud of seeing his grandkids and great grandkids enjoy an Airstream!”

So we bought it, and spent money on it and spent more money on it. And could easily spend a bunch more money on it.

With winter over and camping season upon us, Janice and I have been second guessing our purchase. The camper still needs more attention before it can be deemed road worthy and because this is a family project, it is time for our group to tie into it. The problem is our kids are swamped with activities in their own lives and don’t have a lot of time to work on the camper. Jan and I didn’t want the kids to feel obligated or guilty, but we also wanted to flush out the commitment level to this family project. We agreed that if the commitment wasn’t there, we would sell it and chalk one up to experience.

Therefore, we discussed it during a recent Sunday dinner.

“Kids,” I began. “We need to discuss the Airstream. What are your thoughts on finishing our restoration enough to get it going? And do you think you will actually use it? We want you to be totally candid and not feel guilty if you aren’t able to work on it.”

Josh: “Dad, as you know, we are overscheduled this summer, but I still plan on working on the Airstream and using it. The kids (my grandkids) are really pumped and want to go camping. Realistically, it might not be much this year, but we are still interested.”

Jonathan: “I am definitely going to use it and I will do what it takes to get it ready.”

End of conversation. We will hang on to the Airstream for now. But we have learned a lot from this adventure. We did some things wrong and we did some things right. Here are a few:

What kinds of things did we do wrong?

Buy something because it comes available.

When we heard about the Airstream, we were not planning on buying a camper. If we had been shopping for a camper, I would have analyzed it to death, comparing every type and style and age of camper anywhere. As it was, this one camper became available and we were fixated on it. Our challenge should have been which camper at what price and condition, but it became a yes or no on the Airstream, without shopping anything else.

Poor use of emergency fund money.

We didn’t use emergency fund money to buy the camper, but when repairs went over what we budgeted, we rationalized and spend emergency money for those repairs. Not a good personal finance practice.

Thinking a bargain is a bargain.

We didn’t pay much for the Airstream, but we should have researched the repairs more thoroughly. Granted, we had no way of knowing the floor beams under the bathroom were rusted through, but we could have been more realistic in allowing for contingencies instead of feeling smug about the bargain.

Things we did right.

Communication.

Janice and I were totally on the same page when we made the purchase. We talked it through and through, agreeing on where the money would come from and how much we would spend on repairs. We also communicated clearly with our kids about their part in this purchase. Had we not clearly agreed on expectations before the purchase, well…let’s just say that finger pointing could have occurred.

We paid cash.

Yes, we dipped into our emergency fund for unexpected repairs, but we did pay cash for the purchase. Had the Airstream created debt, we probably would have been grumbling with every payment. If we were still making payments, we wouldn’t be so relaxed about hanging on to it for another season.

We invested in a family project.

I realize that this project might not turn out the way we want, but we are still dreaming about the possibilities of family adventures the Airstream will bring us. Will our kids every re-create those camping memories of when they were kids? Maybe not, but together we can create some new ones.

I think that is what Irvin would want.

Readers: What purchases have you made because “it was available”? What “bargains” didn’t turn out to be bargains.

This post has been included in the following Carnivals:

Best of Money Carnival hosted by Fiscal Fizzle … Number One Pick!

Carnival of Money Stories hosted by Buxr Blog … Editor’s Pick!

Festival of Frugality hosted by Beating Broke

Baby Boomers Blog Carnival

photo credit: goodrob13

It is starting again. According to CNN Money, gas prices are up 45% from last March and still rising. Prices may not reach the record high of $4.114 per gallon as reported by AAA on July 17, 2008, but people are nevertheless rumbling, “Gas prices are rising through the ceiling and there is nothing I can do about it.”

I disagree. Maybe we can’t lower gas prices, but we can minimize the impact these prices have in our lives. The following suggestions should help:

1. Adjust your budget.

How much money do you spend on gasoline every month? If you answered, “I don’t know” then you have just confessed that you don’t have a working budget. If you know the answer, then you must cut back on another item as you spend more on gasoline. Hint: If you drive 1000 miles a month at 20 MPG, you are currently spending $150 a month if gasoline is $3 a gallon.

2. Establish your priorities.

Non-negotiables in any budget are food, transportation, housing and utilities. How about eating out? Going to movies? Saving for that Hawaiian vacation? Driving a luxury car? Cable TV? Starbucks coffee? These may seem important, don’t get your wants confused with your needs. Take care of needs first, prioritize your wants and cut the ones you can’t afford.

3. Manage your miles.

Driving to work is a necessity (unless you can car pool…and you should if you can) but think of other driving as a luxury. Be selective and plan ahead so you can multi-task your trips.

4. Consider a more fuel efficient car.

No, I do not recommend that you go into debt to buy a newer car. However, selling your gas guzzler and paying cash for a more efficient one is worth considering.

Although gasoline has risen 45% in the past year, the actual increase in the average budget is only about $50 a month (assuming 1000 miles a month at 20 MPG). Face reality, make adjustments and enjoy life. You can cope.

How do you cope with rising gas prices?

This post was included in the following carnivals:

Festival of Frugality hosted by Frugal Upstate

photo credit: robynejay

Memo to Benjamin Franklin: “Mr. Franklin, the wisdom of your classic adage is timeless. A penny saved is indeed a penny earned. However, at the risk of trampling on hallowed ground, I would suggest that ‘A penny saved is better than a penny earned.’ I realize that your original rolls easily off the tongue while mine is forced and awkward. So here is the deal: your saying will remain a classic and mine will be the title to this blog posting. But at least allow me to explain why I think a penny saved is better than a penny earned. Thank you.”

The value of the saved penny became apparent in our household two months ago when Janice announced that we were not going through another summer with our scruffy, moldy and mildewed deck furniture. I confess that I am clueless about deck furniture, especially the pricing, so I tentatively asked, “How much? And where will the money come from?” Janice was ready for me. She had already shopped, found what she wanted at 60% off retail and devised a plan to pay for the furniture. I love this gal!

What is her plan? Very simple: save cash from our envelopes each month. I realize that one shouldn’t have fluff in the envelope budget, but Janice, who controls the envelope spending, was stashing away cash without me even realizing it. “How?” you may be asking. By slashing our grocery and eating out spending. Janice took “tightening our belts” literally: zero eating out and more diligent bargain shopping for groceries (double coupons, 10% discount on Senior Citizen Day, bargain bin meat purchases, etc.).

I am convinced that we will have new deck furniture this summer, paid for with extra savings, not extra earnings. Janice’s plan causes me to realize several reasons why a penny saved is better than a penny earned.

Here are five:

1. Focused goal setting

We will have our new deck furniture because Janice has a very focused goal. She knows what she wants, she knows what it will cost and she has a plan to get there. As a semi-retired couple, earning extra money would require one or both of us to take on a part time job. Let’s compare…no eating out for a few months…or seeking, finding and holding down a part time job. Hmmm. My belt needed to be tightened a bit anyway.

2. Better money management

Because saving forces us to manage a finite amount of money, we must innovatively find ways to live on less. Earning more, on the other hand, usually promotes sloppy money handling. Answer the following question: “Specifically, what did you do with your most recent pay raise?” If you are normal, it simply disappeared. I rest my case. More earnings will slip through your fingers; saved money is squeezed.

3. Preparation for the unknown

You never know when you might lose your income stream, but if you have practiced saving those pennies, you will be able to cope much better when the unexpected happens. Hint: save for emergencies before they come!

4. Long term benefits

The lessons you learn on saving those pennies will take root in your psyche, giving you a mindset and confidence that you can indeed live on less when you decide to do so. Therefore, whether you are paying off debt, building an emergency fund or investing for retirement, you will succeed because of the seeds of success you have previously sown.

5. Less Taxes

Whereas only the interest earned on savings is taxable income, all earnings are taxable. For example, if you earn 3% on $1,000 savings,  you would pay taxes on $30…$7.50 if you are in the 25% incremental income bracket. On the other hand, $1,000 earnings will cost you $250 of income taxes under the same scenario. Stated differently, you would need to earn $1,323 to net the same as saving $1,000. Had Benjamin Franklin paid income taxes (no one did until their inception in 1862), he would have surely realized that a penny saved is better than a penny earned.

Conclusion

This post in no way infers that earnings are not important. I hope you have a great and growing income stream. But earning more money is of no value until you learn to save. A penny saved is even better than a penny earned because of the great habits savers develop that give them confidence and ability to cope even when life sneaks up on them. Besides, saved pennies are taxed less than earned ones.

Footnote: our back up plan is to cash out our quarter jar…worth maybe $200. With apologies to Benjamin, “A quarter saved is better than a quarter earned.”

As always, I appreciate your thoughts.  Are there other reasons why saving trumps earning?  How about instances where earnings are more advantageous than savings?

This post was included in the following Carnivals:

Carnival of Money Stories hosted by Suburban Dollar

Festival of Frugality hosted by Frugal for Life…Editor’s Pick!!

Baby Boomers U.S. hosted by Baby Boomers U.S. (the Blog)

Carnival of Financial Planning hosted by the Skilled Investor

Carnival of Road to Financial Independence #18 hosted by One Family’s Blog

photo credit: F. Montino

As Janice and I have worked on our budget over the years, we have learned that the more we can automate it, the easier it becomes, the more we enjoy it and the greater our chances of sticking with it.

We want to feel like we are in control of our money, but we also want to relax, enjoy life and not be phobicized by every penny we spend. The following tips might sound sloppy to the nerds among us, but because of the simplicity they give to our lives, we are confident they will serve us well for a lifetime:

1. Actually make a budget.

None of you can escape the reality that you must take control of your money by writing down how much you have coming in and how much you spend. This budget must be realistic, it must reflect your values and goals, and, if you are married, it must be agreed to.

2. Use Envelopes.

If I could give only one hint for hassle free budgeting, this is it. The consistent monthly expenses aren’t the problem; it is those which fluctuate and are difficult to track (such as groceries, eating out and gasoline) that will bust your budget. Even if you painstakingly record each expenditure and then tabulate them at the end of the month, you still have two problems: one is that you don’t know if you are overspending until the month is over; the second is that the tedious practice of recording those expenses is not something most of us will do for a lifetime. Using envelopes solves both of those problems: you CAN’T overspend because when the cash in the envelope is gone, you are done spending for that category. Secondly, there is no tracking of expenditures; the envelope does it for you…simply count the money in the envelope at any point in the month and you will know how much you have spent for that category. Simple and effective…Envelopes rule!

3. Make it automatic.

Janice and I know how much money we need in our checking account after we take out our envelope cash, so we have just enough income directly deposited into that checking account to cover normal expenses (and leave enough buffer to avoid overdrafts). In this way, our checking account is a sort of envelope…we must be vigilant in guarding our checking account balance, but doing so will force us to live within our budget without doing any math or counting any beans.

4. Make savings automatic too.

We normally have an annual meeting to make specific savings goals (Save $10,000 for a replacement vehicle by October, for example). We put these goals in writing, then have other income streams directly deposited into a Savings Account and just let it happen. We track our progress periodically, but the beauty of making it automatic is that no discipline or will power is required.

5. Make investing automatic too.

Do you start to get the idea that we like to make things automatic? Well, you get the point…we have our investments withdrawn automatically every month. No hassle, no effort, no will power. We like automatic.

Concluding thoughts

• Although I don’t hassle with tracking my expenses each month, I can nevertheless track them when needed. How? Using Quicken to balance our check books gives me a simple tool to create category reports any time I need to.
• This system isn’t perfect (none is). Life happens and when we need money unexpectedly, we take it from our savings and then recalibrate our savings goals. Yes, it is a bit frustrating, but we don’t want you to think everything always works perfectly as planned. We have learned to roll with the punches, but even then, it is nice to know that we have planned for those punches.

Summary

Our philosophy is to put self imposed restrictions in our finances so we can live within our means without counting any beans. We might have a better bottom line if we obsessed over every dollar, but doing so does not match our personalities or our lifestyles. What we do has served us well…we have zero debt, we can easily live on less than we make, we are able to tithe to our church and also be generous to those in need. We have every confidence that our plan will continue to serve us well for years to come.

What tips have helped you to keep your budget simple, yet effective?

This post has been featured in the following carnivals:

• Carnival of Money Stories 2 hosted by Modern Tightwad
• Baby Boomers Blog Carnival hosted by Baby Boomers US
• Festival of Frugality hosted by Pragmatic Environmentalism
• Carnival of Financial Planning hosted by The Skilled Investor
• Carnival of Financial Planning hosted by The Smarter Wallet
• Carnival of Financial Planning hosted by Good Financial Cents
• Carnival of Financial Planning hosted by The Skilled Investor

photo credit: KrissZPhotography

What is the Wealth Effect?

Did you know that recessions are good for your savings account, but a booming economy tends to drain your savings? It’s true. In April, 2005, when the stock market was booming, personal savings in the United States dipped to 1% but jumped to as high as 6% during the recent recession. Why this phenomena? Because we instinctively cling to what we have when times are tough, but we also loosen those purse strings when good times return. Meir Stratman, a behavioral finance expert at Santa Clara University, explains that this tendency, known as “the Wealth Effect”, has occurred predictably during past recessions and recoveries.  The Wealth Effect occurs because we allow our feelings to trump our financial logic:  when we “feel” threatened we save,  but when we start to “feel”  optimistic we spend.  

What Does This Mean to You?

With the worst of the recession seemingly over, it is time to guard against the wealth effect in your own life. Because you don’t want to wake up a year from now wondering how your savings dissolved and your debt grew, you need to become pro-active today. The following hints will help you keep your savings and spending on track.

Four Ways to Continue Saving

1.   Make it automatic.

If you saved when you felt threatened, you will default to less saving when you feel optimistic. You therefore need to remove your emotions from the equation by making your savings happen automatically. It is simple: have a portion of your income deposited directly into your savings account.

2.  Give it a name.

When recessionary fear no longer drives you to save, you need a positive motivator. Giving your savings a name will do it. Be creative: call your emergency fund your “unemployment account”. Saving for a car? A “car” fund is mundane, but what if you called it your “paid for Honda Pilot” account?

3.  Agree with your spouse.

Being on the same page is essential anyway, but becomes critical in case one of you starts to waver. Your agreement means that the two of you will keep each other accountable.

4.  Write it down.

Putting your goals in writing makes the difference between hoping something will happen and making it happen.

Four Ways to Control Your Spending

1.  Budget.

Another way of writing it down. You have a much better chance of controlling your spending when you have a written plan.

2.  Use cash.

Studies show that people spend more with plastic than they do with cash. Why? Because cash registers pain when you turn loose of it. Plastic, on the other hand, moves you a step away from the reality of the purchase. More distance = less pain = more spending.

3.  Have agreed limits with your spouse.

The two of you need to agree to an amount each other can spend without spousal assent. Whether this amount is $25 or $500, just be sure to agree.

4.  Plan to spend.

After exercising lots of self control during tough economic times, some people fall of the wagon, splurge, and then wonder what happened. Sound familiar? You can offset this tendency by giving yourself a budgeted amount of money to spend at will. Simply write “spending money” into your budget and pay yourself a monthly allowance…always cash of course. This relief valve will prevent big explosions.

As the recession comes to an end, the Wealth Effect will try to sneak into your life. If you are pro-active today, you will avoid its negative influences.

Halloween 1983 Jeremy, Josh, Jonathan and Jaime Plemon in homemade outfits

 My wife is a remarkable homemaker; we could never have raised four children on a single income without her amazing skills and creativity.  She was our family barber, the seamstress who patched the knees of torn jeans and fashioned homemade Halloween costumes (robot outfits made from egg cartons can look awesome when done right…see photo) and kept us all well fed. Because I consider Janice to be not only a master cook, but an expert in grocery shopping frugality,  I asked her to pen her top ten grocery saving tips. These are from her:

1. Use the store ads to learn what their in-store bargains are for the week. Plan a simple menu based on these sale items.

2. Make a shopping list from this menu and stick to it.

3. Avoid junk food. It is expensive and bad for your health.

4. Stock up on sale items you know you will use.

5. Shop the perimeter of the store. Stick to basics. Buy fresh meats, fruits and vegetables instead of the more expensive prepackaged foods. Don’t trade quality for convenience.

6. Use coupons. Newspaper coupons often coincide with in-store specials. Shop the stores that offer double coupon values.

7. Never buy items simply because they are on sale or because of coupons. A bargain is not a bargain if you don’t need it or use it.

8. Check the price per ounce costs. You can often get a better deal with two smaller containers instead of the large “economy” size.

9. Buy fresh foods in season. Visit the farmer’s market for good foods at good prices. You can support the local economy and hopefully avoid the shipping surcharges of grocery store foods.

10. Make school lunches instead of purchasing them. Because our kids detested cafeteria food, they readily ate the lunches Janice prepared for them. She could monitor what they ate as well as save money. But make sure the lunches are indeed homemade and not the prepackaged expensive ones. When you consider four children eating five meals a week, our savings from this tip alone were substantial.

Bonus Tip

Use cash from your “grocery” envelope. This requires a bit of trial and error because most people don’t really know how much they spend on groceries in a month. But give it a try. Put what you think you spend in an envelope and purchase your groceries from that envelope throughout the month. When the envelope is empty, you will know exactly how much you spent. We have done this every month for years and never have to worry about overspending. Try it. It works.

photo credit: piermario

• “I get worn out trying to track every dollar.”
• “It just didn’t work.”
• “I’m not a numbers cruncher.”
• “Budgets are just too complicated.”

Sound familiar? These are just some of the reasons why Janice and I have struggled with budgeting over the years. We would diligently write the numbers on a yellow lined pad, but we just couldn’t make them work in real life. Our budget attempts were more theory than reality. But five years ago, we tried using the envelope system and we instantly felt like we were in control of our money. At the risk of sounding like a cheesy infomercial, we are so sold on using our envelopes that we cannot imagine ever giving them up.

“OK”, you say, “I’ll bite. What is the envelope system?”

We will get to the envelopes in a moment, but first let’s define the problem.

The Problem

Your budgeted expenses could be broken down into two categories: monthly payments that stay essentially the same (house payment, car payment, telephone, cable TV, etc.) and ongoing expenses which fluctuate (groceries, eating out, gasoline, clothing, etc.). It is those fluctuating expenses that cause your budget to come unglued. Why? As you purchase these items throughout the month, you simply don’t have a good way to know if you are overspending your budget. At best, you will tabulate all of your expenditures at the end of the month, but even then, the month is over before you know how much you spent. At that point, when you discover that your budget didn’t work, you feel like giving up. Don’t! There is a better way.

The Fix

Start by trying one of these fluctuating expenses. I recommend “Groceries” because it is the largest of these expenditures for most people. Write GROCERIES on an envelope and place your monthly budgeted amount of cash into that envelope at the first of the month. Always buy groceries with cash from that envelope; never with a check or plastic. As the month progresses you will always know how much you have spent to date on the groceries: just count the money left in the envelope. And here is the best part: you can never “accidentally” overspend because you are limited to the cash you put in the envelope.

Realistically, your first month probably won’t work because, if you are like most people, you really don’t have a handle on how much you currently spend. No problem. Adjust your budget and try again next month. Keep at it and eventually you will get it right. If you don’t have the full month’s cash available at the first of the month, fill your envelope twice a month or even weekly. But don’t cop out by saying you can’t afford it. You are already buying groceries anyway; this is just a different way of doing it.

Once you have mastered the grocery envelope, try another, such as “eating out”. Eventually you will find the number of envelopes that work for you. And hey…if you try it and don’t like it, you can always go back to the way you used to do things. (But I don’t think you will.)

The Glue

Exactly how does the envelope system become the glue for your budget? By making It both simple and functional. When you feel the empowerment of knowing you are actually in control of your money, you will stick with your budget. That is some great glue.

What Do the Plemons Use Envelopes For?

The envelope system has worked so well for Janice and me that we use it for every fluctuating expense we can think of: groceries, gasoline, eating out, clothing and entertainment.

A couple of years ago, we decided to create a “Bless” envelope so that we will always have cash available for others when special needs arise. Having this ready resource at our fingertips not only allows us to bless others, but simultaneously removes financial strain from our own lives when those needs occur. Would we be able to do this without our envelope system? Probably not.

I don’t want to find out.

photo credit: Matt McGee

These past three posts have walked you though the process of getting your budget up and running.  I pointed out the five pitfalls you will need to avoid, the four benefits of a successful budget and five steps to putting the budget in place.  You have listened and you are making it work and telling your money what to do.  Congratulations!  Your life will never be the same!

But after putting so much energy into the details you may be wondering, “What now?  Am I simply going to be a numbers nerd the rest of my life, or is there more meaning to all this?”  Great question!  Allow me to help you see the big picture of where your life is headed.  Gaining control of your money is going to allow you to focus on your financial goals, and will progressively give you more and more cash flow.  So stop, take a deep breath and ask yourself, “What should I be doing with this cash flow?”

How did you answer?  Janice and I have discovered that our budget allows us to SAVE, SPEND, and GIVE.

1. SAVE.

You will have something “normal” Americans don’t have: disposable income.  What will you save for?  In our case, we save for the basics: retirement, kids’ college, cars, remodeling our home and vacations (or staycations).  You get the idea…basically everything.   Don’t borrow your way back into debt; save!

2. SPEND.

You have done well.  It is perfectly all right for you to spend money that you have saved.  Enjoy!  Go out to eat more often.  Pay cash for that dining room set you have been salivating over.  As you may have read in another recent post, we just bought an old “project” camper with cash we had saved.  We can afford to refurbish it (a little at a time) with saved money.  The point is this: your budget allows you to spend money you couldn’t have otherwise.  You are not meant to live a pauper’s life.

3. GIVE.

If all we ever did was save and spend, life would become pretty empty.  We are not here on earth to simply satisfy our own pleasures.  But because generosity, for most of us, doesn’t happen spontaneously, we need to budget it.  Whether you give to your favorite charity, your church, or the single mom down the street who could use some new tires for her car, it is this element in your budget that will truly make your life meaningful and satisfying.  In addition to our church tithe, Janice and I set aside (budget) a little cash every month simply for blessing other people.  If you do everything else right and never give, then, in my opinion, you have failed.  GIVE!

Readers: What hinders your budget process?  In what ways does your budget allow you to save, spend and give?