Debt Free / Savings Challenge Week 3: Envelopes & Emergency Fund

It is hard to believe that we are ready for our third week of our Debt Free Challenge for 2012!!  If you are just catching up, you will want to go back and complete the steps for Week 1 and Week 2 and then come on back and pick up here.

You should have completed your budget, cash flow, debt snowball and net worth forms  – whew that is a lot!  It may have been less than a good time, but it is important that all steps are completed so that you can ensure you are ready to move on with our next steps in helping you gain better control of your finances and work yourselves out of debt (or increase your savings account if you are already out of debt).

The first thing that we will do this week is work through your budget and how to “fix it” if it is not working.  We’ll also talk about a new way of spending – all cash!

ACCOUNTING FOR BUDGET SHORTFALL

If you have completed your budget and now have a shortage (meaning less money than bills), I mentioned that we’d go through the steps as to how to make your budget work for you.   If you find you don’t have enough money coming in to cover all of your expenses, you have to find something you can cut out in order for your budget to work.   Here are a few ideas:

• Cut back on dining out
• Scale back to basic cable or drop it all together and use your computer or an antenna
• Drop extra cell phone services
• Drop your home phone service all together
• Lower the thermostat and cover up with blankets (raise in the summer and use fans as they use less electricity)
• Keep appliances not being used unplugged as they still pull juice, even when not turned off
• Cease 401(k) or IRA contributions (only temporarily until you are out of debt)

If you find that you have done all of the above and still don’t have enough money to cover your bills, you can try to work out a deal with your debtors.  Call and ask if they can reduce the interest rate and/or the minimum monthly payment.   With the economy still in a downturn, these companies are losing money left and right with people who just can not pay, so they are oftentimes willing to work with someone who wants to pay.  Of course, this is not always the case and I am not guaranteeing that it will work for you, but is absolutely worth a shot.  Of course, you may meet with resistance from your companies, but it is worth a try at least.

If you have done this and find you are still short, you will need to find a way to get some extra cash.    You may find a way to add a second job or even free up some cash to eliminate a small debt.  For you, it means you are gong to deviate from the plan a little bit.  Just read on and set up your envelope system but rather than setting up your Emergency Fund, you are going to have to use those same ideas in order to make your budget balance first.  If your budget doesn’t balance, you can not start your journey.

ENVELOPE SYSTEM

Cash is King!!  I say this all of the time, but that is because it is something I truly believe in.  I honestly disagree with the statement “If I have cash, I spend it far too easily.”  It is in fact, the opposite.  I find that because I use cash, I spend more wisely.  When you have only $200 for groceries and you also know that your cash must last for 2 weeks, you really think twice before you buy that extra item.  Of course, with couponing, you usually are able to save and spend less, which can help, but you still should always use cash.

The first thing to do is take a look at your budget.  You should seriously consider using cash for the following items:

• Groceries
• Clothing
• Dining Out
• Hair Cuts/ Beauty
• Doctor Visits
• “BLOW” (which is your spend as you want – only if you can afford it)
• Medicine
• Doctor/Dentist Visits

You will notice that I didn’t include gasoline in my list.  The reason I didn’t is that most people won’t overspend at the pump.  Most of us just fill up our tanks and go about our merry way.  You also don’t drive around and burn fuel or decide to fuel up because your neighbor did.  This is a budgeted item, but not one where you might spend above your budget.  Not only that, it is usually much more convenient to pay at the pump.

When it comes to an envelope system, you can purchase an envelope system as sold by Dave Ramsey or you can just use the envelopes in your desk drawer.  Just note your categories on the outside of each one.

Next, you need to determine how much cash you need for each category each pay period.  For example, if you are paid every two weeks, take the total monthly grocery budgeted amount and divide it by 2, to figure out how much grocery cash you need.

Go through each category you plan on paying for in cash and determine the amount you need.  Then, figure up how many of each denomination of bill you will need and include a breakdown for the teller.  Go to the bank and withdraw that total amount in cash and divide it into each envelope.  Confused?  LOL!  No problem – here is an example:

MONTHLY BUDGET

$500 Groceries
100 Clothing
100 Blow
50  Doctor
12  Medicine
  100 Dining Out
$862

MONTHLY BUDGET DIVIDED FOR BI-WEEKLY PAY

$250 Groceries
50 Clothing
50 Blow
25  Doctor
6  Medicine
   50 Dining Out
$431

BREAKDOWN FOR EACH BUDGETED ITEM

Groceries:   14 - $20 bills   1 – $10 bill
Clothing:  2 - $20 bills  1 - $10 bill
Blow:  2 - $20 bills  1 - $10 bill
Doctor:  1 – $20 bill 1 – $5 bill
Medicine:  1 - $1 bill 1 – $5 bill
Dining Out:  2 – $20 bills  1 - $10 bill

SHEET TO GIVE TO TELLER WITH YOUR CHECK FOR CASH BACK

$1 bills – 1
$5 bills – 2
$10 bills – 4
$20 bills – 21

So, you have your cash is that all?  Nope!  Now that you have your cash in your envelopes, you will need to keep track of every. single. transaction.  I am not joking.  Doing this can help you stay on track and you also have to account for everything you spend.  So, when you spend $20.17 at the grocery store, make sure to deduct that from your total.  You can jot it down on the outside of the envelope, or keep a paper inside with the cash for you to use to track it.

Some of you may be disagreeing with me because you “get rewards on my credit card, so we do that and pay it off every month.”   That may be the case, but you still are not in control of your spending.  It is still very easy to spend and extra $50 at the grocery store.   Most of the time you don’t even realize you have exceeded your budgeted amounts until the bill comes.

It isn’t completely about cash.  It is learning self control.  That is the one thing everyone will learn in going through this process.  Cash enforces this.

You will quickly learn to love using cash and  you will feel more in control of your finances.  We’ve been doing this for so long that I don’t know how to shop without my envelopes!   It is routine and it helps us always know, in a matter of minutes, how much money we have available for the things we need.

EMERGENCY FUND – STEP 1

Now your budget is done and you are ready to get cracking on that debt!  But wait just one moment.  Before you can do that, you need an emergency fund?  Why?  Picture this –  You are working hard, you are getting out of debt and BAM!!! ….. the furnace goes on the fritz.  Of course, you are in debt, so you go further into debt to pay for it.  This is one cycle that you will want to break immediately.  Before you can begin to really pay off your debts, you need to be able to pay for emergencies that will come along.  And trust me, they will.

That is Step 1 – $1000 Emergency Fund.  That may sound unattainable for so many of you, but you just might surprise yourself how quickly you can do this.  It just doesn’t make any sense to pay off debts to have something break and then go back into debt.  You really want to be able to cover your emergencies without adding back to the debt you have already worked hard at eliminating.  Here are ways to build up an emergency fund:

• Have a yard sale
• Sell items on Craigslist
• Get a part-time job at night
• If your budget has excess, use that to put into savings rather than paying towards debt
• Use your tax refund

We actually did several of these steps ourselves when we began our financial makeover.  We sold items on Craigslist, we had a garage sale, we saved our tax refund and we were fortunate enough to have money left over from our budget.  It took us a few months, but we did it and it felt great to see that when we put our mind to it – we could accomplish it!  We knew right then and there that we could get out of debt!

Of course, it was tough to part with things we had.  However, they were just that — things.  They weren’t required to make us happy.  They were wants and not needs.  We realized that it was much more important to have no debt than some of the things we were not really using, lying around the house, collecting dust.

Getting $1000 in the bank may take one person 1 month and another couple 6 months.  There is NOT any deadline on achieving this goal.  It just needs to be met before you can begin to really work on paying off your debts and move onto Week 4′s lesson – The Debt Snowball.   Come back next week and learn how we are going to start to work on paying off those debts!

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(I am not a financial advisor and the information listed within these Debt Challenge posts is not to be construed a financial advice.   This is knowledge we gained through our own personal experiences and information as outlined in Dave Ramsey’s Financial Makeover — and is being shared as such.  Participants are not required to follow any steps listed if they do not wish to do so. Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)