Envelope Budgeting.

For those who have a hard time not excessively spending on their credit cards, the envelope budget method may be the best solution for you. The envelope budget method places a specific amount of cash in each "category envelope" every month. For those who have a hard time controlling their spending this may be the best form of budget control.

To use the envelope budgeting method first grab a piece of paper, a pen, and all your bills for a given month. Then calculate the total cost of all of your bills. You will want to include all forms of insurance, car loans, housing, utilities, cable, internet, phone providers, medical bills, etc.

Next, figure out how much money you earn per month on average. After this has been determined, subtract your bills from the amount you earn. The left over money can be used to determine how much money you can allocate to groceries and gasoline.

Remember to leave some spare money for savings and discretionary spending if possible. Discretionary spending, money for buying things you would like but do not need, is optional. It should only come after having enough money for bills, necessities, and a good amount of savings. Roughly thirty percent of your take home paycheck is considered adequate savings (for more read the 60/40 budgeting solution article).

After you have determined how much money should be allocated to each budget category, get four envelopes and a pen. On the envelopes you will record the four categories of your budget; bills, groceries, gasoline, and discretionary spending. For example, on one envelope write "gasoline" on the outside of the envelope, repeat until you have an envelope for each budget category.

When you receive your first paycheck go to the bank and cash it. Looking at the amount you predetermined necessary for bills, groceries, and gasoline place the cash value into each budget envelope. If there is excess cash after filling each envelope place it into a savings account until you reach thirty percent of your monthly income. With your second paycheck finish filling your savings account until you reach the budgeted thirty percent. Any excess at this point can be placed into the "discretionary spending" budget envelope.

If there is not enough cash to fill the bill, groceries, and gasoline budget envelopes with the first paycheck use the second paycheck to finish filling them. Any excess from the second paycheck should be placed into a savings account until you reach the budgeted thirty percent. After that amount has been reserved, place the rest of the cash into the "discretionary spending" budget envelope.

This is the basic concept of the envelope budgeting method. This method is an excellent solution for those who spend excessively on credit cards or have trouble not spending their savings. This helps you to remember not spend more money than is within each envelope. It also provides a visual for exactly where that money needs to be spent and what is means if you spend it on discretionary items instead of the necessary. For example, if you spend your grocery money on a new game system you know you will not have any food for the entire month.

The point of the envelope budgeting method is to help you to spend more wisely. Another advantage of this budgeting method is to provide you with encouragement as you begin to follow the budget you created for yourself. This method should help you stay positive and consistent in your budgeting.

The 60/40 Budgeting Principle.

Have you ever worked hard to set aside savings only to be devastated when the savings must go towards fixing your house or car? Most budgeting techniques encourage you to set aside a specific amount for retirement, fun, savings, necessities, and bills. In a budget like this you are missing one key element; the unexpected.

Preparation for the future and retirement is important in a budget. Paying your bills, buying the necessities, and some fun money is also very important. But emergency funds and vacation money is just as important as these other areas. If money is not allocated for these areas you can risk breaking your budget.

There are six main categories every budget should include. A budget should have a category for bills, necessities, retirement, long term savings, short term savings, and discretionary spending. When you create your budget each category should list all the transactions you have that fall under that category.

Bills are expenses in your budget like cable, internet, phone provider, housing, car loan, student loan, medical bills, insurance, etc. Necessities would be expenses in your budget like groceries and gasoline which are not always the same exact amount each month. Long term savings is money set aside for emergencies like job loss or major catastrophes. Short term savings is money set aside for vacations, repairs on your car or house, credit card debt reduction, and holiday gifts. Discretionary spending is the money you set aside in your budget to buy optional items that are not necessary. Items like a new shirt or an MP3 player.

Few people have any idea how to manage all these categories of budgeting. You feel daunted by even trying to figure out how much to allocate to each category. Recently Richard Jenkins wrote an article for MSN Money laying out an excellent plan for how much of your income should be set towards each category.

Jenkins proposed that sixty percent of your gross income should go towards bills and necessities. Your bills and necessities should not exceed sixty percent of your income. If your bills do exceed sixty percent, it may be wise to reduce the total debt on some of those liabilities.

The other forty percent of your income should go towards the other categories. Ten percent of your income should be reserved for retirement. Another ten percent should be set aside for long term savings. Ten percent should be reserved for short term savings. The final ten percent should be allotted to your discretionary spending budget.

If these estimates are not possible for you, the percentages can be adjusted. Your budget may look more like eighty percent on bills and necessities with the remaining twenty percent being divided equally among the last four categories. For example; five percent for retirement, five percent for long term savings, five percent for short term savings, and five percent for spending money. Either way some money needs to be set aside proportionately in your budget for each of the four non-bill categories.

The 60/40 budgeting principle provides an excellent ballpark of how you should budget your money. Following this concept can provide you with an excellent cushion no matter when or what the crises may be. Budgeting should always contend to solve every possible contingency as the 60/40 budgeting principle does.