The envelope system is a method recommended my many financial professionals (including Dave Ramsey) for making a quick and easy budget. The above video is a short, straight-forward introduction to using this system.

The best financial decision I ever made wasn’t a financial decision: I got married. Much to my surprise, my financial life turned around once I found my beautiful bride. Mine is not an unusual situation — according to Barbara Dafoe Whitehead and David Popenoe from Rutgers University. people who marry are, on average, four times richer than those who never marry. Here are some of the reasons why:

Marriage makes you pay attention. You are no longer that idle bachelor, you’re in a partnership. Stupid decisions that you make now don’t just affect you, they affect someone else.

Marriage encourages long-term thinking. It’s not until you start planing ten, twenty, or thirty years ahead with someone that you understand what long-term savings really means.

Marriage cuts many bills in half. The moment you move into an apartment or buy a house together, every communal expense such as rent, heating, and property taxes has just been divided. Many other bills such as food and electricity are much cheaper for two people than for one. Just watch out for lifestyle inflation and, for heaven’s sake, don’t have a baby.

Marriage lowers taxes. Most countries, like the United States and the United Kingdom, give tax benefits to married people.

Marriage Makes Men Work Harder. According to Avner Ahituv of the University of Haifa and Robert Lerman of the Urban Institute, married men drink less, take fewer drugs and work harder, and earn 10% and 40% more than single men with similar backgrounds. (From The Economist, May 24th, 2007 The Frayed knot)

Marriage clarifies your thoughts. The big advantage of getting married is that you now have to say out loud your financial plans to another human being.

The first time you try and plan your finances with your spouse, you’ll probably realize that you don’t have a plan. You thought you had one, but when you try to articulate it, you discover that the details are missing — like trying to recall a dream hours after waking.

Working with someone else forces you to clearly articulate your goals. When you make a budget together you have to decide what your priorities really are, and it helps to talk them over with your partner. Do you really want to eat out that much, or would you rather put that money into the ‘early retirement’ and ‘vacation’ funds?

Marriage makes millionaires. In both The Millionaire Next Door and The Millionaire Mind, the author Thomas Stanley, states many times that one of the factors Millionaires credit as the source of their wealth is their spouse.

I don’t recommend you go out trying to find a fiancée so that you get wealthy, but if and when you do get married, don’t forget about the financial benefits.

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Header photograph by cedarjunction

The number one cause of divorce in the United States is disagreements over money. If you want to keep your marriage in good condition regular, open financial talk must be a part of your relationship.

Arguments over money are probably such a large issue in relationship because the way you spend money shows, in an undeniable way, where your priorities really are. If you talk about how much you want to save for retirement, but actually spend money on eating out, then eating out is really your priority.

Making a budget is actually a priority setting activity — which is exactly the kind of important thing that you should be regularly doing in a relationship.

Here are the steps that Noelani and I follow at the start of each month for a successful couple finance meeting:

1. We gather all the information about our incomes from the preceding month.
2. 15% of our pre-tax incomes goes toward long-term savings and retirement before any other discussion. No negotiation.
3. We estimate the month’s bills, and put that amount of money into our joint bills account. We pay the bills proportionally to our income e.g. if Noelani makes 45% of the household income, she pays 45% of the bills and I pay the remainder.
4. We review any medium-term savings plans we have, such as travel or large joint purchases. This money is put into separate ING accounts and is also split proportionally.
5. The money we individually have left over after our joint budgeting is our discretionary money. We can each do whatever we like with our respective remaining money without needing to consult each other. Having a little financial space of your own is important for releasing some of the pressure.

While it sounds like a hassle, it only takes us fifteen minutes to complete the steps, but that’s after the practice of years. Our first time took an entire night (mostly because estimating bills is difficult the first time through), but it gets faster with each repetition.

More important than sorting out the bills is the communication about our future, common goals. Some of the big changes we are making in our lives are the direct result of conversations we’ve started in these meetings. A couple finance meeting is a dedicated time to talk about the shape of the future you want with your partner — so make sure you get started on them if you haven’t already.

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Header photograph by neona

For many years I tried, and failed, to make a budget. Planning ahead, I discovered, didn’t work for me. I’d sit down with a piece of paper and scribble some expenses, starting with the easy, predictable ones like rent. But, soon I’d get to the more nebulous areas of my budget, like food. ‘Just how much do I spend on food?’ I’d wonder, without any idea.

Rather than recognize my ignorance as a warning sign that I really needed a budget, I took it as an excuse to stop. ‘Well’, I’d think, ‘If I don’t know how much I spend on food, I can’t really start, can I?’

To be fair, planning out a month’s worth of expenses for the first time is a daunting and anxiety-producing task. I suggest an easier method that worked for me: grow your budget, don’t plan it. Here are the steps to grow a budget.

1. Start your budget with known expenses. Take out a sheet of paper and list all the easy-to-measure expenses. These will be your fixed, predictable costs such as monthly rent. If there are any bills that are reasonably consistent or that you are somewhat confident about their amounts, add them.
2. Leave the rest of your money undefined. Add all the expenses you wrote down in step one and subtract that amount from your take-home pay. If your expenses are $1,000 a month and your take-home pay is $2,500, the difference is $1,500. Take the left over money and put it in a debit card account. Your first month of budgeting is now done. Yes, the majority of your money is unaccounted for, but that’s no problem. The budget will improve each month.
3. Pay all your expenses with the debit card. By paying your random bills, going out money, and miscellaneous expenses from the debit card, the bank tracks your expenses for you.
4. In the second month, add your undefined expenses to the budget At the end of the first month of this process, the bank will send you a statement. From this, you can now estimate last months’ expenses. If, after looking through your previous month’s debit card records, you discover that you spend $200 on eating out, that goes on next month’s budget. Adjust up or down as you see fit.
5. Repeat from step two. Each month that passes will give you a slightly better idea of how much your average expenses are and help you plan for next month’s budget and have less money unaccounted for.
6. As unexpected expenses come up, add them in. Surprise! Valentine’s day is in February. If you need to plan to spend a certain amount of money on Valentine’s day for a trip with your partner, then take the total amount you spend (say $500) and divide by 12 ($42). That’s how much you need to put away for Valentine’s day each month. (I recommend using ING direct to store the money)

There are some disadvantages to growing your budget rather than planning it out. Chief among them is the time it takes — about a year to work out all the kinks. As an example, it didn’t cross my mind that I needed to budget for the rather expensive London-Raleigh Christmas flights to see my parents until about December 20th. After scraping that unwelcome surprise together, I now shuffle £45 a month into a ‘flights’ ING direct account to prepare. To help mitigate the stress of unexpected costs, I recommend you have at least a partially-stocked emergency fund before trying to grow a budget.

The chief advantage of growing a budget is, however, that you actually start budgeting. Growing a budget allows you to let go of the need for perfection. Beginning with a poor budget, and slowly improving it is miles better than doing nothing at all.

Go plant that seed and start your imperfect, but self-improving budget today.

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Header photograph by sakura

The New York Times, using data form the Bureau of Labor Statistics, has created the budget of the Average American. You can click around and see, on average, what your neighbors are spending their money on. Most interesting, the budget is color-coded so you can easily see how inflation has affected the various spending categories. (I think we all know which way gas has gone)

[Click here to see the average American’s budget]

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