Spending has been part of our lives since money replaces trade by barter. My grandma used to put all of her cash in the cookie jar. As farm produce were sold, it went into the cookie jar. As needs arose, the money to pay for them was taken out of the cookie jar. When the cookie jar was empty, there was no more spending until more cash was earned.
As time went on and the management of expenses became more complex for grandma, she gave up cookie jar and started to use an envelope system. Money was placed in various envelopes according to the allocations of the income – one envelope for soup ingredients, one envelope for clothes, one envelope for school fees, one envelope for medicine, and one envelope for giving.
Despite using envelopes, the cookie jar principles still applied. The income was allocated and placed into the envelopes, and money was spent in the various areas allotted. When an envelope was empty, the spending stopped until more cash was earned and placed in it.
In examining the cookie jar or envelope system, we can find three basic principles that were applied in order to control cash flow. The first principle is that money was always pre-allocated. In the era of the cookie jar, the inflow and the outgo were so closely related that it was not necessary to allocate to various categories.
The spending was done as the need arose. However, as both income and kinds of expenses increased, the income needed to be pre-allocated and placed in an envelope for the intended use.
The second principle is that spending always stopped when the envelope or cookie jar was empty. The reason was simple, there were no alternatives.
The third principle is that grandma always had a current awareness of the financial situation relative to the planned situation. It was very simple to determine whether there was any money left in the envelope or the cookie jar. If there was, not all of the spending had been done that the plan called for. If, on the other hand, it was empty, the plan had been accomplished.
The same guiding principles need to be evident in our financial spending today: a pre-allocation of income, an end to spending when the spending limit is reached, and a current awareness of the financial situation relative to the plan.
In order to put a cash control system in place, you must accomplish five steps. I want to caution you that this five-step process may take as much as two years to accomplish, and it is essential that there should be flexibility.
Step 1: Estimate your living expenses
Estimate your living expenses in as much detail as possible. I suggest that you not attempt to estimate them down to the cent, but rather shoot for 80% accuracy this first time.
Step 2: Record what actually happens
At this point in the process, you are capturing the data in order to evaluate how closely your actual expenses are to what you estimated them to be. Recording the data and increasing your awareness will also help you control your spending. You will need a system of summarizing all of your expenses according to the expense categories you previously estimated. You can do this on a worksheets or even on your computer if you have one.
Step 3: Establish a budget
After you have estimated your expenses and recorded what has actually happened over a time period of three to twelve months, it is time to established a budget.
Step 4: Control the budget
Many people I know still use the envelope system to control their budget. They put a pre-allocated amount of money each month into various envelopes and stop spending when the envelope is empty. Another alternative is a sheet of paper for each pre-allocated spending category. List on the sheet of paper the date, the purpose, the deposit, the withdrawal, and the balance for that expense category.
The cash control system should allow the incorporation of several important basic principles. For example:
Assigned accountability. Husband and wife each have areas of budget responsibility. For example, the husband may be responsible for mortgage and utility payments while the wife will be responsible for food and miscellaneous spending. Each is assigned the cash allocations necessary to fulfil these functions.
Immediate feedback on how actual spending measures against planned spending. The key is to know as soon as possible when budget limits have been reached. Budget requires extra work, however, once the budget is established, it should not require more than 20 to 30 minutes over an entire week, and the benefits are more than worth the effort.
Regular accumulation of cash flow margin should be followed. That is, all funds not used during the month should be transferred into savings. It will be necessary during some months to transfer from savings back into the budget.
At times it may be necessary to use funds allocated for one purpose for some other purpose. This can be done but it requires a specific decision each time a transfer is made. For example, you may decide to give up buying clothes for entertainment. The budget allows you to do this in a visible manner.
Every month or every pay-cheque, some amount of money should be set aside in a savings or separate interest yielding account for the expenses that will occur on other than monthly or even planned basis. Example of such expenses is gift to in-laws, car repairs, medical bills, seasonal clothing etc.
As time went on and the management of expenses became more complex for grandma, she gave up cookie jar and started to use an envelope system. Money was placed in various envelopes according to the allocations of the income – one envelope for soup ingredients, one envelope for clothes, one envelope for school fees, one envelope for medicine, and one envelope for giving.
Despite using envelopes, the cookie jar principles still applied. The income was allocated and placed into the envelopes, and money was spent in the various areas allotted. When an envelope was empty, the spending stopped until more cash was earned and placed in it.
In examining the cookie jar or envelope system, we can find three basic principles that were applied in order to control cash flow. The first principle is that money was always pre-allocated. In the era of the cookie jar, the inflow and the outgo were so closely related that it was not necessary to allocate to various categories.
The spending was done as the need arose. However, as both income and kinds of expenses increased, the income needed to be pre-allocated and placed in an envelope for the intended use.
The second principle is that spending always stopped when the envelope or cookie jar was empty. The reason was simple, there were no alternatives.
The third principle is that grandma always had a current awareness of the financial situation relative to the planned situation. It was very simple to determine whether there was any money left in the envelope or the cookie jar. If there was, not all of the spending had been done that the plan called for. If, on the other hand, it was empty, the plan had been accomplished.
The same guiding principles need to be evident in our financial spending today: a pre-allocation of income, an end to spending when the spending limit is reached, and a current awareness of the financial situation relative to the plan.
In order to put a cash control system in place, you must accomplish five steps. I want to caution you that this five-step process may take as much as two years to accomplish, and it is essential that there should be flexibility.
Step 1: Estimate your living expenses
Estimate your living expenses in as much detail as possible. I suggest that you not attempt to estimate them down to the cent, but rather shoot for 80% accuracy this first time.
Step 2: Record what actually happens
At this point in the process, you are capturing the data in order to evaluate how closely your actual expenses are to what you estimated them to be. Recording the data and increasing your awareness will also help you control your spending. You will need a system of summarizing all of your expenses according to the expense categories you previously estimated. You can do this on a worksheets or even on your computer if you have one.
Step 3: Establish a budget
After you have estimated your expenses and recorded what has actually happened over a time period of three to twelve months, it is time to established a budget.
Step 4: Control the budget
Many people I know still use the envelope system to control their budget. They put a pre-allocated amount of money each month into various envelopes and stop spending when the envelope is empty. Another alternative is a sheet of paper for each pre-allocated spending category. List on the sheet of paper the date, the purpose, the deposit, the withdrawal, and the balance for that expense category.
The cash control system should allow the incorporation of several important basic principles. For example:
Assigned accountability. Husband and wife each have areas of budget responsibility. For example, the husband may be responsible for mortgage and utility payments while the wife will be responsible for food and miscellaneous spending. Each is assigned the cash allocations necessary to fulfil these functions.
Immediate feedback on how actual spending measures against planned spending. The key is to know as soon as possible when budget limits have been reached. Budget requires extra work, however, once the budget is established, it should not require more than 20 to 30 minutes over an entire week, and the benefits are more than worth the effort.
Regular accumulation of cash flow margin should be followed. That is, all funds not used during the month should be transferred into savings. It will be necessary during some months to transfer from savings back into the budget.
At times it may be necessary to use funds allocated for one purpose for some other purpose. This can be done but it requires a specific decision each time a transfer is made. For example, you may decide to give up buying clothes for entertainment. The budget allows you to do this in a visible manner.
Every month or every pay-cheque, some amount of money should be set aside in a savings or separate interest yielding account for the expenses that will occur on other than monthly or even planned basis. Example of such expenses is gift to in-laws, car repairs, medical bills, seasonal clothing etc.
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