My mother grew up in England during World War II where they were rationed to one egg per week, one ounce of cheese per week and little meat. Tea did double duty; first as a drink and then used it as a die for clothes. She learned to do a lot with a little. Even after she grew up, married my Dad and moved to America, she was still, shall we say, frugal. But as a child, I never did without.
As I began earning my own money, I didn’t follow her habits. I did what is often referred to as Bank Balance Accounting. If it’s in the bank account, I have it to spend. I was good at paying off my credit cards every month and I did contribute the max to my 401k and I thought that was good enough for retirement. It isn’t! Like many people, I was “one paycheck away from bankruptcy.” OK, that may be a bit of an exaggeration but you know what I mean.
Then I was laid off and I had to face my spending habits straight on. The first couple of months I felt sorry for myself. Then I decided to approach it as a challenge. Once my mental attitude shifted and I implemented Mom’s budgeting system I have discovered how easy it is to actually live within my means.
Ask yourself, what would you do if you had a medical emergency in your family that caused you to be accountable for your MAXIMUM out-of-pocket costs for the year? Do you have $7,000 or $10,000 in available cash? What if your car dies? Can you pay cash for another car? Or can you even afford to add car payments to your monthly budget? There’s a 50/50 chance you could weather that financial storm.
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On April 8, 2017, MarketWatch.com reported,
“More than seven years after the Great Recession officially ended, there is yet more depressing research that at least half of Americans are vulnerable to financial disaster.
Some 50% of people is woefully unprepared for a financial emergency, new research finds. Nearly 1 in 5 (19%) Americans have nothing set aside to cover an unexpected emergency, while nearly 1 in 3 (31%) Americans don’t have at least $500 set aside to cover an unexpected emergency expense, according to a survey released Tuesday by HomeServe USA, a home repair service.”
My mother used to tell me to pay for EVERYTHING with cash. She’d say that it’s harder to let go of cash than it is to hand over a credit card. She was right. Try it for just one week. Take the cash out of the bank that you will spend over the next 7 days and pay with cash. Lunch. Gasoline. Happy hour drinks with co-workers. The movie. Everything! When you run out of cash, you are out of money. Don’t go to the ATM and withdraw any more. Sound impossible? Start with doing it for three or four days instead of a full week.
This is the first step in working your way up to Mom’s Budgeting Method. This first step is simply awareness. Yes, you know it, but are you aware of it every day?
My Mom used to divide Dad’s paycheck into envelopes. Five envelopes actually… and one bank account.
1. Groceries & Gasoline. Sometimes she had to make the money stretch further – like Birthdays, Easter, Thanksgiving and Christmas dinners. That didn’t mean she put more money in the envelope. That meant that the rest of the meals that week were more frugal. Usually, she put a pound of ground hamburger in the spaghetti sauce but when she had to stretch the budget further, the sauce was meatless. As kids, we didn’t know that was the reason. We just knew that sometimes we had meat in the spaghetti sauce and sometimes we didn’t.
2. Household bills (gas, electric, mortgage payment/rent, student loans) This is the easiest to manage. These bills tend to remain the same amount each month. In the winter the gas bill is higher than the electric bill, but in the summer it’s the other way around.
3. Vacation Fund. We took a family vacation every year. That was really important. When there wasn’t much money we took a camping trip. One year my parents took us to Europe, but to make a European trip affordable, they rented camping gear and we camped through Europe. As kids we didn’t know that was the reason why. Mom and Dad made it tons of fun.
4. Entertainment. This was for both my parents’ entertainment as well as my brother and my activities. If we had a summer camp, my folks would forego their dinner date and opt to have friends over for a game of cards instead.
5. Rainy Day Fund (aka Emergency Money) This one is tough. We all know we need it, but we inevitably run out of funds when we get here. I think that’s because when we get into a budgeting mindset we think we have to jumpstart it. In reality, we may not have the funds to put $100 a month in this account. That’s OK. Start small. $20 a pay period. $50 a pay period. At first, it’s more about getting your allocations right than it is the amount.
The bank account was called the Savings Account. Now we’d call it a Retirement Account. Back in Mom’s day there was no such thing as a 401k. THAT was the account that got paid first. And she never touched that account. At the end of every year she’d take what was in the Rainy Day Fund (if there was any) and transfer it to the Savings Account at the bank; starting the year over. I think she may have left a little in there just in case she had a flat tire or something in January or February, but you get the idea.
Financial advisors tell us we should save 20% of our income. If you can, put the entire 20% into a 401k. |
Financial advisors tell us we should save 20% of our income. If you can, put the entire 20% into a 401k. But if you don’t have access to a 401k our there’s a maximum allowable contribution, then calculate the difference between 20% and what is going into the 401k and put the balance into a savings account – OR make that a target to work towards.
50% of our funds are supposed to go to “Necessities,” according to the experts. In my opinion, that would be Envelopes 1, 2 and 5 above.
That leaves 30% for Envelopes 3 and 4.
Do the math. If you followed the 20/50/30 rule, would your income cover your lifestyle?
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I’m currently reading a business book called Profit First by Mike Michalowicz. It’s based on the same philosophy of budgeting money; only for businesses instead of families. Ironically he said his mom also used the envelope method when he was growing up. In the book, he recommends that businesses follow a similar budgeting system, only instead of envelopes, have several bank accounts. He further suggests that a business have two banks. One bank has two accounts; a profit account and a tax account. Much like Mom’s savings account, Mike recommends a business pay the profit account first. He also recommends that this bank be inconvenient to get to and that you don’t sign up for online banking at this bank. His logic is, if you are tempted to tap into your profit account, it’s a real pain to get to.
You could apply a similar approach to your personal budgeting. If you can’t resist tapping into savings or your rainy day fund, put those accounts in a bank that is inconvenient to get to. To deposit funds into those accounts, write two checks and mail them with deposit slips every payday. Out of sight, out of mind. Just like your 401k. You are contributing to your 401k right?
Perhaps you have credit card debt you have to pay. If that’s the case, put your credit cards in the freezer (again, to help avoid temptation of using them) and instead of the savings account, open a separate bank account for paying these off and only use that money to pay off your credit cards. Start by paying 1% over the minimum amount. This is like a savings account in the long run because of the high interest you are paying; as long as you don’t continue to use the credit cards. Imagine eliminating that debt and the interest that goes with it and then putting that same amount into a savings plan after the debt is paid off! 1% is nothing. You won’t feel it. At first, it may not even seem like it’s worth it. But it is. Each month, increase the amount you are paying by 1%. Not by 1 percentage point, but by 1%. For example, if you usually pay $200 a month towards your credit card debt, this month pay $202. You won’t miss that $2 will you? Next month pay $204.20. The following month pay $206.06. As crazy as it may sound, you won’t miss the little extra and it will get those credit cards paid off faster for you.
Since I’ve started paying cash for everything I have definitely cut down on my spending. Especially for the littlest things that really add up. It used to be when I went to the gas station I’d pick up a bottle of ice tea and a pack of gum when I went in to pay for my gas with my debit card. Now I plan to pump $50 worth of gas into my Ford F-150 truck each week and I walk into the cashier with $50 cash. Ice tea and gum may not sound like much. It’s only $2.50 a week. More importantly, it’s $130 a year. $130 will pay off a credit card with $1000 balance with a 19% interest rate one month faster. For me, I would rather put $130 into my savings account – or vacation account – and forego the tea and gum than give it to Visa to pay interest on something I bought in the past and don’t even remember what it was.
I know it sounds crazy, but my Mom’s budgeting system really does work!
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