On budgeting household expenses

How do you budget your household expenses?  I do it the very traditional way – through the “envelope system”.

Yes, these are the actual budget envelopes that I use.  They are made of recycled mail envelopes, prettified with craft papers and alphabet stamps I got from Divisoria last year.

I used to have an old set of these envelopes, made also from recycled mail envelopes but they’re so worn-out already.  Since I have plenty of craft papers at home, I made a fresh batch as my little project last month.  The envelopes are more pleasant-looking now kaya mas nakakagana mag-budget hehe!

So, how does the “envelope system” works?

I found this nicely written article about it at Frugal Living in About.com, which I am quoting in full text below:

1. Create a budget.   In order for the envelope system to work, you need to know how much money you have coming in and how much money you have going out. Start by creating a budget that reflects your current financial situation.
2. Divide your spending into categories.   Look over your budget, and divide it into areas of spending: food, gas, clothing, entertainment, etc. Then create an envelope for each category. No need to be fancy; a plain, white envelope with the category written on the front will do.
3. Fill your envelopes.  Fill each envelope with the money that you’ve allotted to that particular category.
4. Spend until the money is gone.  Pay for your purchases out of the appropriate envelopes – using the food envelope for food purchases and the clothing envelope for clothing purchases – but only until the money is gone. At that point, all spending in the drained category must cease until the next month.
5. Put any leftover money into savings.   If you have any money left in your envelopes at the end of the month, add it to your savings or use it to pay down a debt.
6. Refill again the next month.   Refill the envelopes, and start again. Each month is a new shot at making your budget work.

Since AJ and I are both working, we have agreed to contribute 50-50 to our household expenses.

It’s easy to budget for the rent and internet/telephone subscription because these are fixed expenses (meaning, the amount you pay for these items are the same for each month) so you simply set aside a particular amount to put in the designated envelopes.

On the other hand, expenses for gasoline, electricity and grocery vary depending on our actual need.  To come up with a workable budget for these expense items, we looked at how much we are spending for gasoline, electricity and grocery items in the past 3 months.  I computed the average for each expense item, then added P1,000 as buffer.  For example, I computed the average gasoline consumption at P1,500 per month, then added a P1,000 buffer so our working budget for gasoline is P2,500 per month.

We review our budget every 6 months to see if we need to put more in these envelopes.  So far, we have made only one (1) upward adjustment and that’s in the gasoline budget because AJ brings the car daily to work now.

We also have a designated envelope for our monthly savings, which goes to our joint bank account and small mutual fund investment.

Any leftover budget money is rolled over to the following month as additional budget, instead of adding it into our savings (so we are not following #6 above).  For example, if we save P500 in electricity this month, this P500 becomes an additional budget for electricity for the following month.

We have saved some money from our low electricity bills in December last year up to February this year (the cold season), and this extra money will help pay for the additional charges we are sure to incur now because we have been using the air-con almost every night (summer na k’se).

What about you?  How do you budget your household expenses?  I’d love to know about your ‘style’ and techniques!