Budgeting and Personal Cash Flow Tracking

A budget is simply a plan for how to spend your money.  

One of the best ways to plan ahead for expenses is to apply zero-dollar budgeting to the envelope expense allocation system.    

Years ago, smart budget conscious folks used to split up their monthly paycheck (i.e. cash) into 10 or so envelopes, allocating a certain percentage (and dollar amount) to each.  The envelope expense allocation strategy basically forces you to limit or cap the amount that you could spend for each expense category. When you wanted to buy a pair of shoes, for example, you would literally draw money from the clothing envelope and no more.  You would therefore be very conscious of the amount of money that you could spend that month for an expense category. 

If you exceeded your monthly budget for one expense category, which would happen occasionally, you would have to use what was left over from the other envelopes, and no more.  

That's the envelope part.

The zero-dollar budgeting part means that every dollar had to be accounted for.  You had to "spend" or allocate each and every dollar.  In other words, every dollar has a job.  Even the excess amounts - that goes into your Savings envelope.   If you're not generating surpluses across the non-savings envelopes, you won't be able to save anything towards your retirement account, your rainy day fund, or towards the purchase of a big-ticket item like a car or a home.  In this way every dollar that comes in (i.e. your income), is accounted for.

This approach is great because you would force yourself not only to live within your means, but also to save for important things like your retirement, healthcare, etc.

Here is an example of how you would break up your cash flows using the envelope system:

As you can see, every dollar is accounted for, after savings has been factored into the equation.  In the end, what you spend or account for must equal what you take in (i.e your income).

There are many budgeting apps out there that can help you budget your money (i.e. track your cash flows).  Here are some that I recommend:

• Mint.com (free)
• Quicken $30
• neobudget.com $5/th
• moneywellapp.com $60 one-time fee

I also recommend checking out Kiplingers magazine and David Ramsey's Total Money Makeover, and DavidBach.com for learning how to take control of your money.

To access the Budgeting and Cash Flow Tracking exercise, please click on this link.

To access the Cash Flow Budgeting Powerpoint presentation, please click on this link.

To access the Net Worth vs Net Income Powerpoint presentation, please click on this link.

For homework, please complete the Kiplinger's article question and Cliff's Wonderful Financial Adventure exercise sheet.