New Year, New Systems Part 2: Managing Expenses

If you are like me, you want to know where your money is going (even though you know it is going to clothes, shoes, and Chipotle).  I think the key to that is a good budget and a good system to manage your expenses.  So borrowing a little advice from Mr. Dave Ramsey's Guide to Financing, I developed a detailed budget and then placed my budgeted money into his envelope system.  Basically Mr. Ramsey instructs to know where every single dollar is going and to use cash in order to manage this. 

Essentially, each category of your budget (food, clothes, etc.) gets a designated envelope with cold hard cash that you take out at the beginning of the month or biweekly, whatever you prefer.  You place your budgeted money into its designated envelope.  Whenever you purchase something, you take money out of the corresponding envelope.  When you run out of dough, you run out.  There is no replenishing until next month.  So here is what you gotta do to get there:

Step 1 Budget:

I've got multiple spreadsheets going on here.  One for an annual budget and one for each month of the year.  I’ve got money budgeted from groceries and insurance, to Starbucks and dry cleaning.

Annually: Here I’ve got my predictable expenses spread out across a year.  Insurance, car payment, gas, tuition, taxes, cell phone, etc. This helps me see how much of my money is going where in a year.

Monthly: A few days before each month, I’ll plan my upcoming expenses.  If there is nothing unpredictable coming up, it will look just like the annual form.  But if I know I need new tennis shoes soon, I’ve got a birthday/holiday coming up, or I’m planning a vacation, I’ll budget for it that month.  I can also see what percent of my monthly income is going towards each expense.  This is helpful and really provides some perspective.  If 50% of your budget is going towards clothes, something is up.  I also have a column for what I actually spent, and a column for the difference.  That way when the month is over, I can plug in what I’ve actually spent and know if I need to adjust the amount budgeted for the next month. 

Step 2 Envelopes:

After crafting a detailed budget, I placed budgeted money into envelopes (you can find some fun printable envelopes here!) at the beginning of the month.  Below are the categories I chose.  I picked these because it is where I tend to spend frivolously and unpredictably.  But obviously these can be tailored to your own crazy ways.

1.      Groceries: Straight forward.  I tend to stop at Wegmans between the gym and work in the morning to pick out a “treat” for my hard workout or to grab a lunch if I forgot one.  This needs to be controlled.  Hopefully I'll end up eating less muffins as well.

2.      Clothing/Shoes: Some months are more than others if I know I need a holiday outfit or my tennis shoes are wearing thin.

3.      Leisure Activities: Anything in the entertainment department goes here

4.      Dining out/Dranks: Got to budget for hot dates, time with my roomies and friends, and of course, happy hour!

5.      Fast food: I try to avoid eating fast food, but this is for those times where I’m starving and it is not possible to get something from home.

6.      Starbucks/Coffee:  The amount I spend on coffee is ABSURD.  Some days you are just not in the mood for what your K-cup selection has to offer, ya know?  But this is just not necessary so I've capped myself off with this envelope.

7.      Gift Fund: Odds are, there is a birthday/anniversary/holiday sometime in the month

8.      Necessities: Toiletries, deodorant, etc. Things you can’t avoid replenishing every month.  We can’t have you smelling at work because you didn’t budget for soap.

You may have noticed things like gas and co-pays weren’t on this list.  I decided that gas is something I don’t spend a lot on (thank you 10 minute commute!) and when I need to go somewhere it is pretty much unavoidable.  I wouldn’t keep myself from going to the doctor or dentist if I needed it.  I’ve got these hypothetical expenses covered in my budget, but I don’t see a need to inhibit my spending here with an envelope.

Dave says spend all the money you budgeted and if you don't, you've budgeted too much.  I’m twisting this a bit.  I’m going to try to spend as little as possible and split what is leftover at the end of the month.  Half will go into savings and half will go toward my dream jar.  This will be emergency shoe cash or maybe money to put towards furnishing my new place!  We shall see.  Either way, this is an opportunity to reward yourself for not spending everything you budgeted.  But be sure to make adjustments to your budget if you continue to underspend (or overspend!).

So these are my systems!  Dave Ramsey, the bill manager, and I are ready to take on the real world.  What do you use to manage your expenses?  I'd love to hear!