If you’re a money-management junkie like I am (or likely even if you’re not), you’ve probably at least heard reference to the jar system or the envelope system of budgeting before. A couple of well-known advocates of the system include Dave Ramsey, and Gail Vaz-Oxlade, who regularly uses the jar system on her financial management show ‘Til Debt Do Us Part’.
The basic premise of the system is that all of your variable expenses are paid for in cash. Your fixed expenses can be paid for using whatever system you’ve used in the past, which for many people involves automated payments directly from their bank account (this is the case for us). The system is effective for a few reasons, but a couple of the major ones are accountability (if you can only spend cash, it’s not possible to overspend beyond the limits of your budget), and a psychological quirk – it’s harder to spend ‘real’ money (ie. cash) than it is to swipe your debit or credit card. This helps keep impulse purchases in check.
What do we mean by variable and fixed expenses? For us, our fixed expenses include rent, cellphones, internet, hydro, water, insurance (car, home, etc), charity, debt repayment (student loans), and savings. Fixed doesn’t necessarily mean the amount for these is exactly the same every month (our utilities, for example, fluctuate month-to-month), it just means that these are payments you must make, and you have no real say in the amount (yes, you can make decisions upfront, like renting a cheaper place, but once committed, your monthly payments aren’t flexible).
Variable expenses for us include food (this category includes groceries and restaurants), gas, entertainment, pets, clothing and gifts, miscellaneous, and irregular expenses. Obviously there’s only so much flexibility in some of these categories – you need to eat, so you can’t set your food budget at zero, but it’s still considered a variable expense because most people spend more on food than they actually need to for the sake of basic nutrition and survival (there’s absolutely nothing wrong with spending more than the bare minimum on food of course, but that’s simply why it’s considered a variable expense).
It’s important to have a miscellaneous category to allow a little bit of wiggle room for expenses that may pop up that wouldn’t normally be covered in your budget. The irregular expenses category is the extra money we put aside each month to cover irregular expenses that come up throughout the year that we know the approximate cost of. For us, this includes Christmas, weddings (travel costs and gifts), domestic travel (visiting Chris’ parents, for example), routine car maintenance (oil changes, winter tires), and sports (Chris’ annual soccer registration fee). These expenses occur only sporadically, but we know approximately how much we spend on each when they do come up, so we calculate this total amount, divide it by 12, and put that amount into our short-term savings account every month. This prevents these expenses from throwing off our budget when they do occur. An important note: This is not the same as an emergency fund. These are still planned expenses, not unexpected emergencies. We have a separate easily-accessible short-term emergency fund (for things like unexpected car repair), as well as a long-term emergency fund in a high-interest savings account that has 6 months of basic living expenses in it (this is for things like layoffs, or short-term disability or illness that prevents one or both of us from working).
Anyway, long-winded introduction aside, back to the jars/envelopes! (we use both)
We have 6 labelled jars that we use for this system. They are each labelled with one of our variable expense categories, and at the beginning of the month, we take out the amount of money we need for each budget category for the month, and put it in the appropriate jar. I will note that if you have a large budget (larger family, or just higher income) you might not want to be taking out a full month’s worth of money at once, as that’s a lot of cash to have lying around. For us, our budget for variable expenses is so small, that it doesn’t actually add up to that much, but use your own discretion here.
So, you’ve taken out your cash for the month, and divided it up into the appropriate jars. In order to know how much to put into each jar, you’ll need to have a realistic budget for each category. The easiest way to figure this out is to track your spending for a few months, either using an old-fashioned pencil and paper tracking system, or by using an online system like mint.com. You can then see how much you’re spending in each category, and use that to set your budget.
While we store our monthly budget amounts in the jars, we then take out our weekly amount for each category, and put them into a tabbed cash envelope that we carry with us when we’re out and about. Every time we make a purchase (groceries, gas, etc), we use the cash from the dedicated section of the envelope. Some people would then write down the purchase using pencil and paper, but we use an Android app called EEBA. It allows you to enter your monthly/weekly cash budgets in each category, and then every time you spend, you enter the purchase, and it tracks the balance for you. We also take the receipt and place it in the correct jar when we get home, as a backup tracking system.
This is the type of cash envelope we use:
We got ours from Etsy seller ATime4Everything. It’s made of laminated fabric, which protects it from wear-and-tear. It came with 6 tabbed dividers, which I labelled with our specific budget categories. It does a great job of keeping the cash organized.
Once the money from a specific category is gone, that’s it, you can’t spend any more on that category for that month. If you’re desperate, you can take money from another category, (for example, if you run out of food, you can borrow from your entertainment budget) but that means you now have less to spend in the entertainment category for the rest of the month. If you are consistently borrowing from other categories, you may need to reevaluate your budget, as it may not be realistic. The idea is to drive home the point that money is finite, and when it’s gone, it’s gone.
I’m not going to use dollar amounts, but here’s a percentage breakdown of how we budget our variable expenses:
First, we spend 44% of our monthly income on variable expenses (the remainder goes to our fixed expenses).
Of that 44%, we break it down as follows:
Clothing and Gifts: 5%
Irregular Expenses: 5%
(If anyone’s doing the math and noticing that this adds up to 101%, it’s because I rounded to the nearest whole number).
Not everyone’s budget will break down the same way. We spend a lot on food (a personal choice), and a lot on gas (long commute, not ideal). As a result, we don’t have a ton of money left over for the other categories, but we find we have enough to live a lifestyle that’s comfortable for us.
Once you adjust to the jar/envelope system, you might find you’re so good at managing your money that you actually have money left over in your jars at the end of the month. Go you! In most cases, the best thing to do with this extra money is to either use it to pay down debt, or stick it in savings.
A lot of people think of budgeting as restrictive and dull, but there is really nothing that compares to the sense of freedom that comes from knowing you have no debt, and that you have the money to do the things you really want to do (travel, buy a house, etc). This is especially true for people who don’t make a ton of money – if you don’t have much, it’s even more important to manage what you do have so you can accomplish your goals and eliminate (or prevent) debt.