Ever wondered how the envelope system works? Here's a step-by-step look at how to use an envelope system.
3 Minute ReadTopic: budget
There are more than nine million Americans who are self-employed, and many others who work on straight commission. If you’re in either group, you know the challenge of budgeting for an unpredictable income. Sometimes it can feel like you’re aiming at a moving target!
The good news is that it’s just as simple to plan for an irregular income as it is for a regular one. And just as important! We’ll show you how in these three easy steps:
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1. Create a budget.
When you make your budget, base your income on your lowest-paid month from the previous year. (We’ll cover how to handle more or less income in step 3.) Then list all your expenses—everything from the electric bill to retirement savings to groceries. The Monthly Cash Flow Plan budget form can help you here. Then put the amount you want to spend next to each item, such as $100 for the cable bill or $200 for eating out. Once it’s all in front of you, the next step is to list your expenses according to importance.
2. Account for irregular income.
Now that you’ve got a basic, bare-bones budget laid out, it’s time to plan for any income you bring in over that worst-case scenario you sketched out in your regular budget. Use the Irregular Income Planning form for this by listing all your other possible expenses in priority order. Ask yourself, If I had enough money for one more thing, what would it be? Write that down. From there, continue to list expenses from the most essential to the least. Do this according to your needs. Don’t let some credit card collector scare you into thinking that paying them is a bigger deal than buying your child’s school supplies. Now that the plan is set, it’s time to spend.
3. Go down the list.
When you receive a paycheck, take the amount and spread it out to the items on your budget, starting at the top and working down. Your check may not cover everything listed. That’s okay. Use it to pay as much as you can. Then, when your next check comes in, pick up where the last check left off. If you end up with extra money leftover to budget, then you can save more, spend more or pay more on your debts. (If you have debts, definitely start with this one!)
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Your paychecks may be for different amounts, but with a plan, you can use them all to get one solid result—financial peace. It’s only three steps away!