Implementing a Budget and Budget Controls

Article by R. Joseph Ritter, Jr. CFP® EA

Why is the budget important?  The budget is a critical tool in understanding where your money is spent and disciplining yourself to control your spending. This is especially useful when grocery shopping, which can easily amount to one of your largest expense categories. If you know that your budget is $500 per month for groceries, for example, you know about how much you can spend each week and whether or not you can afford tasty luxuries this week.  The budget can also guide you in allocating money toward the most important items first.

When matched with a goal such as saving or reducing debt, the budget can help to control your spending in a particular category or encourage you to reach important goals. Of course, the opposite is also true. After working with a budget for awhile, you may find that you can allocate money toward other categories. In my household, we recently did this with our internet connection speed.  The increase in our connection speed was made possible by reducing spending in other categories and then allocating some of that money towards the internet.

An easy way to implement your budget and control spending, especially in common household categories, is the cash envelope system. Although there are a number of nice looking products available to use, this is as easy as using small envelopes, which you can buy for a few dollars. Use one envelope per category and mark the category on the envelope. Then, each week or month place the budgeted amount of cash in that envelope. When you go shopping, you would take some money from the envelope with you for the category of items you will be buying. An alternative that may work in certain instances is store gift cards, which operate much like cash.

The cash system is very useful in making sure that you do not go over budget.  When the money in the envelope is gone, then you do not buy anything more in that category until the next week or month.  I highly recommend the cash system especially if you are using a budget for the first time. My wife and I used the cash system to accelerate payment of our debts and train ourselves to stay within a budget on household expenses.

However, the cash system does have some downsides. My wife did not like carrying around significant amounts of cash, especially if she was going out at night. The cash system can be cumbersome when buying items among several different categories, such as buying toiletry items with your groceries. I suggest that you play with the system for a few weeks to figure out what works for you. It is amazing how people seem to come up with unique approaches to implementing ideas, especially if it involves working toward an important goal.

My wife commented that she found the cash system to be particularly useful in knowing how much she had left each month and used that information to plan her shopping trips.

The budget should not be adjusted during the budget period.  Adjustments should only be made when you prepare a new budget for the next period.  For this reason, you may want to start by using a monthly or quarterly budget and work your way up to a yearly budget. Please resist every temptation to revise the budget at any other time. The budget will not work and your goals will not be met if you constantly revise the budget during the month, quarter or year. What you should be doing instead is evaluating your performance.

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