Creating a spending plan can be challenging, but it is an essential step to creating success with an envelope budgeting system. In a recent post, we outlined the first step in creating your spending plan: how to define your net monthly income. Step two involves defining your areas of spending.
STEP 2: Define areas of spending, otherwise known as your envelope spending accounts
“Once you have defined your net monthly income, you are ready to define your areas of required spending. For purposes of consistency, let’s call these envelope spending accounts. Remember from our earlier discussion that there are two types of envelope spending accounts: monthly and periodic. Monthly envelope spending accounts are areas of spending that have spending activity each month. Periodic envelope spending accounts are areas of spending that have spending activity only periodically—for example, quarterly or even annually.”
“Let’s first deal with the monthly envelope spending accounts. Monthly envelope spending accounts can be either required or discretionary. Monthly required envelopes include things like car payments, the minimum or planned payments for credit cards, mortgage payments, etc. Because saving something first is a very important principle to adopt, you should also set aside a fixed amount each month for savings. Monthly discretionary envelopes include things like groceries, eating out, clothing, entertainment, allowances, etc. On a sheet of paper write down each of the monthly envelope spending accounts that are applicable to you. Separate these into required and discretionary.”
“Second, let’s address periodic envelope spending accounts. As with monthly envelopes, these also can be split into required and discretionary spending. Periodic required envelopes include things like property taxes, periodic insurance payments, annual auto registration fees, etc. Periodic discretionary envelopes include things like gifts, vacations, house maintenance, holiday spending, etc. On your sheet of paper, write down each of the periodic envelope spending accounts that are applicable to you. Separate these into required and discretionary.”
Once you have your list of envelope spending accounts, you are ready to define the amount of money you will need for each envelope.
Contains excerpts from Applied Principle 10, Money for Life, by Steven B Smith