Financial Fitness Friday – You Gotta Be Knowin’ Where the Money is Goin’

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How to Track Your Spending and Use the Envelope System

 

You Gotta Be Knowin’ Where the Money is Goin’!

That’s the first step to making your money behave. Have you ever gotten to the end of the month and wondered where all of the money went? Have you ever broken a $100 bill and had the rest of the change just evaporate? If you have (and who hasn’t?) this one tip will make you a lot of money. 

Track where you spend every penny!!!

Where did the money go

That’s right… Track it all! At the end of the day, at the end of the week, at the end of the month and at the end of the year you should know where every penny went. You shouldn’t have to wonder what happened to it… it’s not like it just got up and went somewhere… you sent it somewhere and you should know where.

If you haven’t tried this before, it really will save you a lot of money. When you go to the coke machine at work… write it down. When you run through the drive-thru for sweet tea… write it down. When you buy the snacks at the convenience store… write it down. When you buy gas for the car… write it down. Tracking NotebookWhen you spend any money at all… write it down. Research has shown that tracking everything you spend causes you to spend 18% less because you took the extra fraction of a second to think about the validity of the purchase and had to rationalize to yourself why it was OK or NOT OK to make the purchase. That tells me that 18% of our spending is impulse buying.

There are several way to go about tracking your spending. You can get a small notebook that fits in your pocket and just keep a ledger of your spending. It’s low tech but it is very reliable. There are also several tracking apps out there for your smart phone. Just go to the app store and search for spending tracking apps… I suggest test driving several of the free apps. Most likely one of the free ones will do everything that you want it to do and more.

Since you are already thinking it, I’ll just go ahead and address it now.

Don’t use plastic to make your purchases… USE CASH!

nocredit-cardsSeveral money guru’s will tell you to make all of your purchases on plastic because they are automatically tracked for you and all you have to do is download them. While that sounds great on the surface, they fail to talk about the fact that you spend more money if you are using plastic instead of cash. Drazen Prelec and Duncan Simester of the Sloan School of Management at MIT, did a study about credit cards and your spending habits. Their study found that subjects paid more when they were instructed to use a credit card rather than cash. In fact, they found that they were willing to spend up to 100% more with plastic.

Think about it, if you go out to dinner and all you have is $50 in your pocket, how much is the maximum amount you will be willing to spend on dinner? If you go out to dinner with a plastic card in your pocket, how much is the maximum amount you will be willing to spend on dinner? That hard spending limit just got lifted and the temptation factor comes into play.

JFK-QuoteDave Ramsey will tell you that “debt is the most aggressively marketed product on the planet.” and very smart people prove it every day. The way the sales pitch goes is “We’ll give you 3% cash back for every purchase that you make on _____.” I can’t tell you how many people tell me that they put all of their purchases on plastic because they get cash back or reward points. Here’s the math that allows you to “beat the credit card company at their own game.” You go out for that $50 dinner and let’s say that you are that person the study says will pay as much as 100% more if they are using plastic. You spend $100 on dinner and you get $3 back from the credit company. You win!!! Getting that $3 cost you and additional $50 but you still walk away felling like you won.

I’ll get off of the soapbox but let me finish with CASH IS KING! If you think you can beat the credit card companies at their own game you are delusional!

Now that we’re back to using cash…

Lets talk about the centuries old envelope system.

Here’s how it works:

Let’s say you have budgeted $500 a month for groceries. When you receive your first paycheck of the month, write yourself a check for $250, cash it, and put the cash in an envelope. On the envelope, write “Groceries.”

envelopesystemNo money comes out of that envelope except to pay for food at the store. If you go shopping for food forget to take the envelope by mistake, turn around and go back to get it. Make sure to take enough money to cover your groceries for that trip. If you take $150 and your bill is $160, take some things out of the cart. If you get any change back, put it back in the envelope.

When you get paid again, write another $250 check. That’s your $500 for the month for food. If you want to go to the store but don’t have enough money, then raid the fridge for leftovers. Use the envelope system for items that tend to bust your budget.

Common examples include food (grocery store), restaurants, entertainment, gasoline and clothing. When the money runs out of each envelope, don’t spend any more until the new month starts and new money goes in there.

What about tracking the cash you spent out of the envelope?

Easy… Write the amount you put in and the amount you take out directly on the envelope. If you track your spending and your deposits directly on your envelopes you should always have an accurate balance right there on the outside of the envelope.

Here’s the hard part…

DON’T CHEAT!!!

Be careful not to borrow from other envelopes. When it comes to the envelope system, it can be very tempting to borrow cash from one to fund some other activity. For example, if you use up all your “Eating out” money, don’t be surprised if some inner voice tells you to reach behind that envelope for the one that’s marked “Clothing.”

Remember that the very purpose of the envelope system is to curb your spending and teach you discipline. When you run out of grocery money, you eat leftovers instead of going to the grocery store. If you see your gas money is slipping away faster than the remaining days of the month, then limit your trips or carpool.

If you have a crisis come up in the middle of the month or something happens and you absolutely have no other choice but to shift envelope funds around, then call an emergency budget committee meeting with your spouse. Talk to each other and figure out the best course of action, adjust the budget, and be in agreement on it. Both of you must be involved; it’s a committee decision.

The goal is for every dollar to have a name before it ever gets to you. When it arrives, you just send it to its predesignated location and no further decision making is necessary.

If none of this sounds like it will work for you you might consider using the Track-O-Matic

TrackOMatic

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