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Envelopes can help spendthrifts

When asked what resolution for 2010 they are most likely to keep, more people said they would stick to a diet and exercise plan than would keep a promise to manage their money better.

Finances or food?

Which will you promise to get right in the new year?

People say services for fiscal fitness rate above services for physical fitness when making their New Year's resolutions, according to a survey by Allianz Life Insurance.

But when asked what resolution for 2010 they are most likely to keep, more people said they would stick to a diet and exercise plan than would keep a promise to manage their money better. I guess I shouldn't be surprised that when asked whether financial planning was part of their personal New Year's resolutions, 33.6 percent of the survey respondents answered, "I don't have enough money to worry about it."

You always need a plan for your finances, whether you have a yearly income of $20,000 or $200,000, and whether you have savings and investments or not.

Here's a mantra I want you to adopt for the new year: "Every penny should have a purpose."

This means you need a plan for your money. Going through my mail, I've pulled out questions from people who want to stop making promises to do better with their money. They want an action plan.

"Please tell me about the envelope system," one reader wrote. "I make $45,000 a year. I am in debt for $12,000. I overspend on food. I use my check card a lot and, well, I get in trouble with it. I also use my credit card if I don't have the money. I am in big trouble with my husband."

Another asked: "I am married, but my husband and I are not on one accord on anything. I would like to get out of debt, but I am having a difficult time getting started on a budget. Do you have any advice?"

Here's where the brilliance of the envelope budgeting system comes in. Sometimes, people need a simple way to control what they spend.

I learned to budget using envelopes from my grandmother, Big Mama. To get started you don't need much, just a pencil and a box of envelopes. I prefer an 8-by-11-inch security envelope with a lining to shield what's inside.

On payday, you put cash into various envelopes. You don't have to stop automatically depositing your paycheck into your bank account. But you will need to make a trip to the ATM or your bank branch to withdraw cash.

You are going to label each envelope with an expense category, such as groceries, gas, dining out or entertainment. So, for example, if you've budgeted $500 a month for food and you get paid every two weeks, take $250 and put it in the envelope marked for groceries.

Then when you go to the supermarket, you pay for your purchases using the cash in the envelope. Subtract what you've spent and keep a running tally on the front of the envelope. Using a pencil will allow you to erase the math, saving envelopes.

If you are married, create an envelope for your personal spending allowance. Of course, this means agreeing on a set amount you each get to spend on whatever you want. Using the envelope system will help reduce the many arguments that occur when both spouses are withdrawing money from the ATM without consulting each other. If you each have your own envelope with your budgeted cash, the fussing stops.

Once the money in the envelope is gone, you can't spend until you get paid again.

And this is where the discipline kicks in. Don't borrow from one envelope to make up for a shortfall in another category. Don't use credit to carry you over. Be strong -- live on what you've budgeted.

When all your money is lumped into one account, it's hard to see when you're close to going over budget in one area. But using envelopes, you can see the cash dwindle, giving you a visual clue of exactly what's left.

If you have money remaining, you can keep it for the same category next month or apply it to debt or put it in your savings.

I've recommended this system for people who have had trouble sticking to a budget or who can't control their spending. They often resort to using a credit card -- which, by the way, I suggest you remove from your wallet. If you've been using a debit card, take it out, too. It's not true that a debit card is the same as cash, because you can still overspend and overdraw your account.

Sure, the envelope system is low-tech and old-fashioned, but it works. Trust me on this one.

Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her e-mail address is Reader can also follow her on Twitter at: SingletaryM. Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.
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