Say Goodbye to Living Paycheck to Paycheck: Reverse Budgeting & the Cash System

reverse-budgeting-the-cash-system

This post is part of a series.  To start the series from the beginning, click here.  To browse through the series, click here.

Let’s recap on reverse budgeting and the cash system.

Reverse Budgeting

Reverse budgeting is a three-step savings process.  The first step is to determine how much money you want to set aside each month for savings.   If you aren’t ready to start putting money into savings yet, no problem.  You can still use the model and implement saving when you are ready.

You will also want to create your spending goals or budget for each category at the beginning of the period.  A period can be a pay cycle, a month, or any time period that fits your budgeting needs.

Your budget will need to be reviewed periodically and adjusted as necessary.

Budgeting Tools

Envelopes

The first budgeting tool we will discuss is Envelopes.  You can either use digital or physical envelopes for your budgeting system.

Create an envelope for each of your spending and saving categories.

These are the expenses from the previous example.  Note that with the cash system, there is no use of credit cards.  Instead, we will change the credit card bill to a miscellaneous envelope.

Rent – $500 – 1st of the month
Electricity – $75 – 10st of the month
Water – $50 – 15th of the month
Phone – $50 – 15th of the month
Miscellaneous – $200 – 20th of the month
Internet – $50 – 20th of the month
Total monthly expenses: $925.00

In this example, we will create seven envelopes.

Cash System

The cash budgeting system is cash only.  You shouldn’t use credit or debit cards with this system.  Of course, you can still use bank accounts to store your savings or have your paychecks deposited if you would like.  The main point of the cash based system though is that you cannot over-spend because you physically don’t have the funds to do so.

envelopes-1

You can also note the amount due for each envelope.  Determine your savings goal based on your income.

The income from the previous example is $562.20 every other week.  This means that on a month with two paychecks you make $1124.40.  A good savings goal is $150. This gives you a little wiggle room of around $50 but still ensures that you are saving.  Note that twice a year you will have three paychecks and will need to adjust accordingly.

Rather than dive right into budgeting in two week periods, let’s start with something more simple.  Using a month as a period is the most straight-forward for planning.  At the beginning of the month, plan out the budget for each of your envelopes.

envelopes-2

Since you have about $50 extra as a buffer, you can choose where you would like to put these funds.  You can add them into the savings, add them to another envelope, or just hold them off to the side to use in case you over spend a bit.

Yes, it does sound counter-productive to overspend in a category but habits are hard to break.  Just because you have a budget doesn’t mean that you will be 100% faithful to your budget at first.  It is good to have a little buffer to help smooth the transition into budgeting.  Once you are past the learning curve, you can opt out of having this buffer.

Now that you have your envelopes labeled, fill the envelopes with cash.  Throughout the month, use the cash from the corresponding envelopes.  At the end of the month, you should be left with the money in the savings envelope.  If you are lucky, you will also end up with the buffer money that you can add to your savings envelope.  Well done!

 

A two-week period uses the same technique as the month long period.  The only big difference is that you need to plan your budgeting out a bit more in order to have enough money at each billing date based on the date you get paid.  Use the money from your paycheck to fill as many envelopes in chronological order as you can.  Make sure that the next pay date is before the next envelope without money.  This way you will be able to fill that envelope with the next paycheck prior to the expense being due.

You can also have a digital envelope system.  You can create envelopes like the ones in my example with a simple graphic.  Write your budget on your digital envelopes.  This time, instead of filling the envelopes, put your cash in a safe place and only take the amount you need at a time.

Let’s say it’s time to pay the electricity bill.  Take $75 out of your money stack and put it towards the bill.  Note on the envelope that the money has been spent by using an X over the funds.

This technique is a bit harder to track, especially with the miscellaneous folder.  The most important thing is to be pro-active.  If you are going grocery shopping, take a small amount of money out of your stack and note the deduction on your envelope.  If you don’t spend as much as you planned to, you can add the money back to your stack and add the amount back to your digital envelope.

 

Paper/Check Register – Printable

There are many ways to create a register.  You can use a register booklet typically found in the top of a checkbook.  You could also make your own tracking sheet by using a way to track your finances that makes the most sense to you.

There are many sites online that explain how to balance your register booklet so I will not be going into the details.

Instead, I will focus on some customizable options for tracking your spending.

The best place to find budgeting printables is Google Images.  There are many in a variety of different colors and formats.

Here are two very different styles.  The first tracking device is more of a checklist.  To use this, you would plan your budgeting at the beginning of the period and update the amount of each expense.  Once you make the payment, add the date to the date paid section.

budgeting

This form tracks a bit more information.  Start by creating a line for the starting date for your savings amount. Put that amount aside the total how much cash you have on hand.  Remember, this is the most important part of Reverse Budgeting, saving first.

Every time to take money out of the stack, write down what the money was for and how much.  Then, subtract the amount from the previous cash on hand balance.  This helps you know exactly how much cash you have left at all times.

budgeting-2

Computer Spreadsheet

We just created a tangible tracking sheet for your spending.  If you prefer, you could create the exact same tracking sheet in a spreadsheet such as Microsoft Excel or Google Docs.  This would allow you to check your budget from the computer or even on your phone if you have cloud based documents.

Apps/Programs

It is definitely possible to use apps and programs with a cash system.  However, for many, the apps may be too complicated or have too many options.  For this reason, I am going to leave forgo the topic of apps and programs for the cash system.  Not to worry though, I will be discussing apps and programs in the digital section.

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Say Goodbye to Living Paycheck to Paycheck: Choosing Your Budgeting Tools

choosing-your-budgeting-tools

This post is part of a series.  To start the series from the beginning, click here.  To browse through the series, click here.

Choosing your budgeting tools is one of the most exciting parts of budgeting.  This is where you begin to fit your budgeting to your style.

There are so many different types of budgeting tools to choose from.  Before picking out the types of tools that would be best for you, take a step back and think about your daily life.

Do you find yourself on the computer often?  If so, what types of things are you doing on the computer?  Do you use the computer just for games and chatting or do you also use the computer for emailing, school work, or for your job?  What is your comfort level with the computer?

Now that you’ve begun to think about the tools in your daily life, think about your comfort level with those tools.  Is using the computer a chore to you?  Or, do you enjoy the computer?  This could be a big hint as to which tool you should use.

 

Some of the most common budgeting tools include Computer programs, Computer or Phone Apps, Spreadsheets, Printables, and Envelopes for money storage.

These tools are not to be mixed up with the budgeting system you chose (Cash or Digital).  You can absolutely mix and match the systems with any type of tool.  For example, you can create digital envelopes or tangible envelopes.  You can also use an all cash banking method but use a digital tool to track your finances.  Or on the flip side, you could use a hand written register to balance your electronic funds.

 

With any tool you choose, make sure that the tool fits your lifestyle and that it will not cause you to go out of your way to use it.

 

Still haven’t quite decided on your tool of choice?  Consider your phone usage.  Do you have a smart phone? If so, do you use your phone for mobile banking currently?  Do you use an app to track your grocery list?  If so, an app may be a great option for you since it will fit in well with your routines.

Not comfortable with apps or computers?  A handwritten register or a printable may be the best option for you.

Once you decide which tool or tools you want to use, use them for a few months.  If you find the tool annoying or too time consuming, feel free to switch to another tool.  The point of budgeting is to make your life easier, not harder.

 

Join me in Part 4 as we talk about how to put it all together.  I will go into depth on all of the different budgeting directions, systems, and tools.

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Say Goodbye to Living Paycheck to Paycheck: Beginning Growth

Say Goodbye to Living Paycheck to Paycheck Beginning Growth

This post is part of a series.  To start the series from the beginning, click here.  To browse through the series, click here.

The pre-teen years are great for reinforcing budgeting skills learned throughout childhood.  This is when the need for money becomes a bit more prevalent. Kids may want to go to the movies with their friends, run to the local candy shop, or buy that new trendy item.

One method to use to reinforce budgeting is to remind your pre-teen about the 50/50 rule. Half of money they make from allowance, dog-walking, babysitting, or any other side jobs needs to be put into savings and the other half can be spent.  This not only helps improve their financial responsibility, it helps set them up for success when they need a down payment on a car, need the first and last month for rent deposits, or even purchasing their first home.

I highly encourage all pre-teens to get a savings account if they haven’t already.  That way they have a safe place to put their saved money where it also won’t be a temptation.  While having a savings account is a big step in the right direction, knowing how to care for a savings account is also just as important.  The pre-teen should be taught how to reconcile their account monthly so they know how much they are saving and so they can double check that the bank didn’t hit them with any fees.  It should not cost any money to have a savings account.  If it does, look for an account elsewhere.

The other 50% of the money they earn can be spent however they want.  The most valuable lesson for the spending percentage is saving up for something that takes a bit of time to get to.  This is a very rewarding task and teaches a work ethic as well.

For the parents, it is also important to decide what types of things you will require your child to use their own money for.  While you may pay for your child to go to the movies, maybe any movie theater snacks are their own responsibility.  It’s important to start slow as they are still dependents.

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