Money for Life Applied Principle #9 – Learn the Secret of Envelope Budgeting Part II

applied_principles_091

Envelope Budgeting is a simple, yet effective method of spending management.  There are 4 basic principles of envelope budgeting, and the first is “set money aside in advance.” Setting money aside in advance of spending requirements, is one of the keys to making envelope budgeting work.

“When you commit yourself to the use of the envelope system, you become dedicated to living within your means. One of the primary reasons for this is that the envelope system requires you to set aside money in advance for each of the spending requirements you have, including monthly required and discre­tionary and periodic required and discretionary expenses.”

In today’s economy many families are living paycheck to paycheck.  This can make it a bit challenging to fund each envelope at the appropriate time to match up with spending requirements, but it is possible.   By focusing on living within your envelopes balances as you fund the envelopes each pay period, you should also be able to set aside some extra toward your “30-day funding” goal.

“One of the significant problems people face today is not understanding how future spending requirements will impact their monthly cash flow. Have you ever had an annual insurance payment surprise you? Other periodic spend­ing requirements include vacations, property tax payments, holiday spending, gifts, auto registration fees, auto maintenance fees, house maintenance fees, furniture and appliance replacement costs, and so on. As you think about it, there are many things that can catch you off guard if you don’t plan ahead.” These types of expenses can be a constant challenge for people who are un­prepared for periodic spending requirements.  Using the principles of envelope budgeting, however, will help you to set aside money in advance for periodic spending and keep you from incurring any new debt.

“Most people manage spending by their checking or savings account bal­ance at the bank. Unfortunately, this account balance does not prepare you for the periodic spending needs that will arise in the coming months. It also does not alert you to the spending your partner is planning over the next few days or weeks. So you make independent decisions about how much you think you can spend without really understanding the big picture. This is a very dangerous ap­proach and leads to problems, including bounced checks, frustration, and, ulti­mately, more debt. Most of the overspending in families can be traced to an inability to incorporate periodic spending requirements into their current cash resources and spending practices. A great example of this is the amount of credit card debt that is created during the holidays or on vacations each year as a result of not having money set aside in advance. Many justify this spending by telling themselves that they will pay the credit card balance next month. This rarely happens, because next month’s spending requirements are already based on 100 percent of the cash resources for that month.”

“The envelope system addresses this problem of periodic spending requirements by allowing you to set aside money in advance of periodic spending needs. For example, if you were going to spend $2,400 on Christmas each year, you would be setting aside $200 each month. To state this another way, if you want to spend $2,400 each year for Christmas, you need to spend $200 less on other things each month.”

“Perhaps your parents or grandparents used an envelope budgeting system. Imagine how they felt each December when they prepared to purchase gifts for Christmas and the Christmas envelope was full! Imagine how you will feel when you want to take a vacation and know that the money is already set aside in advance. Or imagine how nice it will feel to know that you have money set aside to replace the tires on your car the next time it’s required. The envelope system holds the secret to setting aside money in advance.”

Contains excerpts from Applied Principle 9, Money for Life, by Steven B Smith

Money for Life Applied Principle #9 – Learn the Secret of Envelope Budgeting

applied_principles_09

Managing your spending can be complicated.  With the use of debit cards, checks, credit cards, online bill pay, etc. it’s no wonder that people aren’t sure where their money is going, or how much they are spending.  It can be very overwhelming to keep track of everything, unless you have a simple, effective tool that will help you do it.  The Principles of Envelope Budgeting are just that… simple and effective.

“Isn’t it amazing how often we learn about simple principles that, when ap­plied, have the ability to impact our lives in profound ways? Such is the case with the traditional envelope method of personal financial management. Many have heard of or are familiar with someone who has used this simple system for spending management. The envelope system has worked exceptionally well for many people in the past. These people understood the basics of the system and how to use it, but many could not articulate the principles behind the system that allowed them to be successful.”

Envelope Budgeting is a tried and true way to manage your spending, and to ensure that you are living within your means.  While the idea of using cash for all your expenses may not be feasible, the envelope principles can still be easily implemented in today’s electronic world.   Let’s first look at how the traditional system worked…

“The envelope system as it was used with cash is very simple. In the days before the proliferation of credit cards, debit cards, and other forms of cashless spending, many couples were very dedicated to this system and used it effec­tively for years. Initially, a couple would sit down together and determine how much cash they would receive each month. This available cash represented the net amount of all of their paychecks for the month. Then, they determined where they would be spending money. Their areas of spending included things that they would purchase and pay for each and every month, and things that they would spend money on only periodically. After completing their list, they took out a stack of envelopes and labeled one for each area of spending. Their next task was to determine the amount of money required for each envelope ev­ery month. For the areas of periodic spending, they calculated the amount they would spend each year, and then they divided this amount by 12. This repre­sented their monthly spending plan.”

“When they received a paycheck, they would go to the bank and cash the check. Then they would sit together at the kitchen table and divide the cash into different envelopes based on their defined spending plan. When they paid for goods or services, they would simply spend from the specified envelope. The envelope became a self-policing spending account. Couples always knew how much money they had left to spend and how long it needed to last.”

Follow along with us through the next few blog posts as we review the four principles of envelopes budgeting.  They are the key to creating financial success.  These principles “reveal the secrets of how you can achieve financial fitness utilizing the envelope system.”

Contains excerpts from Applied Principle 9, Money for Life, by Steven B Smith

Implementing the Success Cycle. Step 4: Adjust.

applied_principles_084Money for Life Applied Principle #8 – Implement the Success Cycle. Step 4: Adjust.

The Success Cycle is made up of four basic steps: Plan, Track, Compare and Adjust.   Step 4 is to make adjustments.

“It is nearly impossible to create a perfect plan the first time around. Great planning is a process that includes both time and experience.  As you plan, track, and compare, you will be able to see clearly which areas need to be adjusted.  These adjustments may include adding spending in some areas and reducing it in others. The entire process does you little good if at the end of your review you are unwilling to make necessary adjustments. Good managers take the information provided from comparison reports and then make appropriate adjustments. These include changes that impact both sales and expenses, ultimately enhancing the overall profitability of the enterprise. Each time you complete the cycle by making necessary adjustments, your plan will become more accurate. You will be surprised and amazed at the adjustments you can make over time.”

Now that we have covered all four steps of the Success Cycle you are ready to move forward.  You are now prepared to immediately implement the principles of the Success Cycle so that you can reach your financial fitness objectives.

Contains excerpts from Applied Principle 8, Money for Life, by Steven B Smith

Implementing the Success Cycle. Step 3: Compare.

applied_principles_083

Money for Life Applied Principle #8 – Implement the Success Cycle. Step 3: Compare.

The Success Cycle is made up of four basic steps: Plan, Track, Compare and Adjust.   Step 3 is to compare your actual performance to your plan.

When it comes to personal finances, many people live in an “ignorance is bliss” kind of state.  Unfortunately burying your head in the sand is only going to bring more stress and anxiety about your financial state.   Once you have your plan and start on your tracking, you need to look back and compare your progress to your original plan.

“A written plan does little good if you don’t take the next step of comparing your actual results against your plan. With physical fitness, a coach will test your performance at regular intervals and compare the new information with past results. This will allow you and your coach to understand the areas in which you have improved and those areas that may require some changes.”

“It is the same with financial fitness. The step of comparing your actual results with your plan is a crucial one. This includes looking at both income and expenses. Planning and tracking do you very little good if you are unwilling to take time to compare your results on at least a monthly basis. As you make this comparison, you will immediately understand how and where to make necessary adjustments.”

Contains excerpts from Applied Principle 8, Money for Life, by Steven B Smith

Vacation Survey Winner Announced!

cash-prize-3

Mvelopes users know how to vacation

We’ve been reviewing the results of our latest survey in which we asked you how Mvelopes and envelope budgeting helps you plan and enjoy your vacations.  The results confirmed that Mvelopes and vacations make a great combination!

Out of the 610 participants in our survey, a whopping 89% of you set money aside in advance for your vacations, using at least a general vacation envelope as part of your spending plan.  56% of you begin saving for your future vacation anywhere from three to twelve months in advance, with almost 20% of you setting up long-term envelopes for major vacations and smaller, short-term envelopes for small getaways.  It seems Mvelopes and envelope budgeting are a real help in making sure your vacations are fully funded!

The recession has caused over 73% of you to make minor to major changes in the way you vacation and how often you get away – and that includes 9% of you who are no longer vacationing because of how the economic downturn has impacted your plans.  For those of you who are vacationing, 19% of you typically spend $500 or less on your average vacation , 30% are spending between $500 and $1,000, and 49% of you are spending anywhere from $1,000 to $4,000 on your vacations.  Creating and funding vacation envelopes in Mvelopes for all of these trips ensures a lot of peace of mind while traveling.  As for the 3% of you who are spending over $4,000 on your vacations – we’d be happy to go along and share in your adventures!

While 15% of you recommend a good book as the best vacation accessory and another 1% can’t bear to be on the road without your favorite hat, the rest of you believe that, as far as vacationing goes, nothing beats a fully-funded vacation envelope as the very best travel accessory.  We agree – and if you have completely funded your vacation in advance, you should have the money to buy a new book or a stylish hat as part of your travel shopping!

As for choosing the best type of vacation, most of you are evenly split between dedicated relaxation or sightseeing and activities.  Fortunately for all of us, whatever we choose to do when we vacation can be financially worry-free when we use Mvelopes to pre-fund our travels. And speaking of worry-free getaways, Rachel P from Illinois was randomly selected from among all survey participants to receive our $350 gift card!  Congratulations – we hope it helps Rachel enjoy a great getaway or doing whatever else fits into her plans.  Enjoy!

Keep watching the Mvelopes Facebook wall for more opportunities to win great prizes, and keep using Mvelopes to help you achieve your personal financial goals!

Photo courtesy of: www.thedigeratilife.com

Implementing the Success Cycle. Step 2: Track.

applied_principles_082

Money for Life Applied Principle #8 – Implement the Success Cycle. Step 2: Track.

The success Cycle is made up of four basic steps: Plan, Track, Compare and Adjust.   Step 2 is to track every transaction.

“Once you have completed a monthly plan, you need to begin tracking your progress. Companies spend billions annually tracking every transaction, including sales, expenses, and cash receipts. Imagine trying to successfully manage a company without using and applying accounting principles. Some try, but largely they either have low levels of success or fail. This should not be surprising. Why then do so many try to achieve personal financial success without tracking their income and expenses?”

“Companies don’t choose which transactions to track-they track every transaction. The only way to get the complete value from tracking is to track every Transaction. If you want to become financially fit, you must be prepared to carefully follow this principle. Tracking every transaction can seem overwhelming at first, but with the right tools, this can be very simple.”

With the Mvelopes application you can track all of your transaction automatically.  The transactions will download each day from your financial institution and you can track exactly where your money is going.

Contains excerpts from Applied Principle 8, Money for Life, by Steven B Smith

Implementing the Success Cycle. Step 1: Plan.

applied_principles_081

The success Cycle is made up of four basic steps: Plan, Track, Compare and Adjust.   Step 1 is to create a plan.

“Without a plan, you will find it difficult, if not impossible, to find your way through the maze of personal financial complexity. Few of us would consider taking a trip to a new location without first consulting a map and planning the best travel route. So it is with financial fitness. After you have created a Net-Worth Statement, you need to determine the direction you will take next. This includes carefully planning the way you will spend your money on a monthly basis.

Planning is an important step in reaching your goals.  Your personal financial plan should include monthly and periodic spending requirements.  It should also include a summary of the income that you receive on a monthly basis.  Your plan should be balanced with your income matching your expenditures.  Every dollar should have a job, but the plan should not exceed your income.  Putting this information down on paper (or in the Mvelopes Application) takes it from a wish list to an actual plan.

Contains excerpts from Applied Principle 8, Money for Life, by Steven B Smith

Applied Principle #8 – Implement the Success Cycle

Money fapplied_principles_08or Life Applied Principle #8 – Implement the Success Cycle

Just like when you are working on becoming physically, you need to develop a plan.  Your plan would need to include eating right and exercising.  These things will help you make progress towards your goal of being physically fit.

The same things are true of achieving Financial Fitness.  You started this journey by learning the principle of spending less than you make. The next step is to incorporate a system into your personal financial life.

The Success Cycle is one of those systems. “Simply put, the Success Cycle is a system that can be adopted and routinely followed to ensure continued improvement and long-term financial fitness. This system includes four steps: planning, tracking, comparing, and adjusting. “

“While the system seems relatively simple, when these steps are followed continuously, the results can be extraordinary. Successful companies everywhere incorporate this system into their monthly, quarterly, and annual management systems and processes. General Electric, one of the world’s most successful and consistent companies, has perfected the Success Cycle. Successful project managers, contractors, and process management professionals all follow this cycle. What’s more, this cycle can be applied to a very small project spanning a few weeks, or to the construction of a multi-billion-dollar industrial plant spanning a number of years. In either case, successful execution requires that each of the steps in the Success Cycle be taken; steps cannot be shortened or eliminated.”

There is no quick fix. Victory comes through steady and persistent application of the proven envelope principles and the Success Cycle. “Consistent implementation of the Success Cycle will force us to become more patient-to be more like farmers and less like hunters. This will ensure our long-term financial success. If you wish to correctly implement the four steps in the Success Cycle, you need to clearly understand each one.”

Follow along in the next 4 BLOG posts as we discuss each of the 4 steps of the Success Cycle.

Contains excerpts from Applied Principle 8, Money for Life, by Steven B Smith