Julie Gumm - Author

The ever-important emergency fund

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Hm, so where did we leave off? Ah yes, we’ve made a budget, we’re using the envelope system and now it’s time to attack those baby steps of Dave’s. For a refresher, they are:

  • $500-1000 in an emergency fund
  • pay off debt except house
  • 3-6 months expense in emergency fund
  • invest15%; college funding;
  • pay off mortgage
  • build wealth

The sad truth is that up until that time our savings account probably fluctuated somewhere between $50 and $350. Maybe. It was obviously so minuscule that I don’t remember.

And what happens when something happens (the car breaks down, etc.) and you have no savings. Well odds are it’s not in the budget so that means it’s taken care of by something plastic with 18% interest. Yick!

So the key to paying off debt is to NOT skip baby step #1 – $500-1000 in an emergency fund.

Depending on your income this is something you might be able to do fairly quickly now that your budgeting wisely. If not look around and see what you can do to get the money. Got an old piece of exercise equipment? Sell it. Tons of junk? Have a garage sale.  Pick up some overtime if that’s available.

Now I know it’s taboo to talk about how much money you make, but as you’re reading our journey I think it’s important for you to understand where we were coming from financially. Families with a smaller income will obviously take more time and I don’t want you to get discouraged by comparing yourselves to us. If you’re making even more well heck, you should be able to beat us.

We were fortunate that when we started the baby steps (2000) we were making pretty good money – between the two of us we were earning about $85-90,000/yr (gross). (Um, this in NO WAY reflects our current salary – we work in full time ministry and have to raise support for Mark’s salary…enough said!)

Once we nailed down our budget, and cut back on a lot of unnecessary expenses we were able to save up that starter emergency fund within two months.

The next piece was going after our debt (student loans, car payments and credit cards) – like gazelles. Come back next week for the REALLY good stuff.

THE REST OF THE STORY

The Envelope System – It Makes Your Budget Work

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Part 6 of our Debt-Free Story

At some point after graduation when we had real jobs and were facing a budget crisis we SORT OF tried the cash envelope system. It kind of worked but was frustrating and not fool proof and we soon gave up.

The problem was that we didn’t have a good budget in place and so it was doomed to failure.

Really it’s an age old system and has been around for a long time. Another signal that it’s a good idea.

So here’s how it works.

After you do your budget look at all the categories that aren’t either bills paid online or auto drafts. So this will be your groceries, eating out, entertainment, date night, clothes, toiletries, car repair, gas etc.

On payday withdraw the total amount of cash for these categories and divide it into envelopes labeled with the category. You can use just regular white mailing envelopes or you can get one of the envelope systems from Dave Ramsey. (If you’re crafty there’s even ways to make your own and have some fun like here and here. Check out etsy.com and search “cash envelope system” for some really unique ones like this and this.)

The idea is NOT to use your debit card! Why? Numerous studies show that people spend 12-18% more when they use plastic (debit or credit) then when they use cash. Think about it. When you go to pay for your groceries what do you think is going to register with you more – laying down 4 $20 bills or just swiping your card. If you’re spending $400 a month on groceries now (using plastic) and start paying cash that’s about $60 you might be able to save.

It took us several months of adjusting both our budget and our envelope categories to get it right. We (and you may be different) have the following categories:

  • Groceries (which includes toiletries, household cleaners, detergent etc since we buy most of it at Wal-Mart)
  • Entertainment (eating out, movie rentals, going to the movies, date night etc)
  • Clothing
  • Gifts (birthdays)
  • House (repair stuff, landscaping, bug spray, stuff like that)
  • Misc (trust me, there is always a misc. that comes up – buying stamps,
  • Babysitting
  • Fun Money (this is an agreed upon amount that Mark and I get monthly to spend any way we like)
  • Kids Allowance (although it never stays in the envelope long – we pay monthly on the 1st)

You’ll notice there’s no envelope for gas. That is our exception to the rule and we use our debit card. Because, let’s be honest, it’s not like your going to SPLURGE on extra gas. Or buy a more expensive gas because you’re using debit and not cash. Besides, what mom wants to drag all her kids out of the car to go inside and pay cash.

Now here’s the kicker. When the money in your envelope is gone, it’s GONE! What do you do if, 3 days before payday, you are out running errands and the 3-yr old is whining from the backseat and your too tired to even think about dinner and are contemplating the drive thru? You look in that entertainment envelope. If there’s money you’re in luck. If not, well suck it up and drive home (turn the music up to drown out the whining).

Now, theoretically you can borrow from another envelope if one has the surplus but beware lest you spend something you need before payday.

I will be totally honest and admit to you that we fall off the wagon REPEATEDLY. Like this summer? Total bust when it comes to the envelope system. And it’s my fault as I’m the budget/cash manager. But I also know that when we are off the system, we are off the budget and nothing comes together like it should.

Be patient – it’ll take you a few months to work out the kinks but I promise, if you use it, it will work. And, most likely, you’ll be spending less which means more money to save or pay off debt. More on that next week!

(Here’s some more tips on the envelope system from Dave.)

THE REST OF THE STORY

The “B” Word: B-U-D-G-E-T

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Part 5 of our Debt-Free Story

So Dave Ramsey lays out these 7 baby steps ($500-1000 in an emergency fund; pay off debt except house; 3-6 months expense in emergency fund; invest15%; college funding; pay off mortgage; build wealth – MORE DETAIL). (We’ve kind of adapted our baby steps/financial plan but that’s a different post.)

Well to get to any of those places there’s one thing that needs to be in place and that is a budget.

Preferably one that works. Our previous attempts had not.

We quickly realized that we were going about it all wrong. We were trying to come up some perfect one-size-fits-all budget in our nice yearly spreadsheet. Sure we accounted for things like Christmas but other than that life was supposed to be the same every month. Right?

Yeah, not so much. When we finally realized that the budget had to be a monthly thing it was like the light bulb went on. Sure, a lot of the expenses stay the same but there are always things to take into consideration.

  • Is it back to school time (school supplies, clothes)?
  • How many birthdays will you be celebrating that month?
  • School pictures?
  • Company coming (bigger food budget)?
  • Car registration?

The bottom line is this: You MUST tell every penny of your income where to go.  Add up your income, list your expenses. If you have extra put it toward your baby emergency fund or your debt. If you don’t have enough? Well, now we’ve got an issue don’t we. (We’ll come back to that.)

I will be the first to tell you that some of our first monthly “budget meetings” were not pretty. Not that they were screaming matches but there was much we disagreed on (why did I need a “misc” category; should golfing come out of his fun money or the general budget). But, we learned to compromise and we knew that if it didn’t work that month we would revisit the issue the next month. And the biggest thing is that we had an agreed upon goal that we were both excited about working toward – paying off our debt.

Dave has some great forms to get you started on his web site.

You might really be struggling to figure out what to put in some of those categories. If you’ve never tracked your spending before you may have no idea what you spend on groceries every month. Take your best guess (maybe look at old debit/credit card transactions) and then save EVERY receipt for the next month to track what you spend.

What if there’s not enough money? If you run out of money before you run out of expenses then there are two things to be done. ONE – cut your spending and TWO – pay the most necessary expenses first (in drastic situations).

The second one is a bit complicated to get into here but I will address the first one briefly. Sometime I’ll do a more detailed post on ways to trim the budget.

There are 3 main areas that seemed to be the first to go to when it comes to trimming the budget (not counting selling cars, etc that have HUGE payments).

1) Eating Out/Entertainment – The average American family spends $225 a month eating out. That’s incredible isn’t it. It adds up quick – a family meal out, some stops at Starbucks, run through the drive thru on the way to/from the kids activities, order a pizza in, lunch for the working spouse(s). One word for you: STOP. Brown bag your lunch, store some frozen pizzas in the freezer, keep a bag of snacks in the car to stave off hunger until you can get home. Budget a modest amount and stick to it. In our strictest budget days we allotted $30 to this category.

2) Groceries – $700. That’s the amount the Jonses (family of four) spend on groceries each month. We knew one couple (w/ no kids) that was spending $900 a month and had no idea that it could be done on so much less. I know families of four who spend $70/wk ($280 a month). I feed our family of six for about $400 a month. I do some coupon clipping but it’s mostly shopping the sales, stocking up when I can and cooking wisely.

3) Cable/Internet/Cell Phones – We’ve come to expect these things. We deserve these things. We need these things. Yes, some are necessary. We need high speed internet at home for our job. Can you downgrade or eliminate your cable package? Can you shop for a new cell plan that’s cheaper? Get rid of your home phone?

Ah, I digress – sorry I get excited about this stuff.

So once we figured out our budget the next problem was figuring out how to stick to it.

Dave Ramsey has a plan for that too. It’s called The Envelope System which I will introduce you to next week.