Envelope Budget System

By Steven B. Smith

Getting out of debt is one of the key elements to becoming financially fit. In a society driven by financial excess, reaching this goal is increasingly difficult but can be done with some determination and the right tools to help you get there.

According to a survey conducted by Impulse Research Corporation, 59% of Americans stated that they regularly maintain a household budget. This number is shocking considering the average household debt in America has grown to $18,700, with credit cards and auto loans combined. This ever-increasing debt load suggests that American families continue to spend more than they make. Obviously, many of the methods being used to manage household finances are not effective.

Despite these astounding debt levels, 41% of people still do not maintain household budgets. The main reasons cited are:

• 57% say, “I have a good idea what I can afford, I don’t need to keep a budget.” Statistics, however, show that many American families spend as much as 10% more each month than they earn. This can often be traced back to not knowing how much has been spent, and how much money is left on a daily basis.
• 45% say that budgeting is “too difficult,” “too time consuming,” or “too confusing.” Budgeting can be all of the above if you don’t have the right tools or information. But with the right tools, budgeting – which is really spending management – can be easy and far less time-consuming. The key is using today’s technology to simplify the process, not complicate it.
• 23% say, “I start budgeting, but loose momentum as the year goes on.” One of the keys to successful spending management is consistency. By using the right tools and putting a plan in place, you can consistently spend less than you earn and quickly eliminate your debt.
• 21% say, “It is too hard to stick to a set budget with more than one person making purchases and using the accounts.” Budgeting, or spending management, can be difficult with multiple people spending from multiple accounts, however, by using an envelope budgeting system, everyone can be involved in the creation of a spending plan, and everyone can see what money is available to spend, how much is left, and how long it has to last. Using an online application like Mvelopes® Personal makes it even easier. Your household’s spending plan can be accessed through a secure online connection from any PC with Internet access. You and your spouse can both see how much is left to spend in each spending category and how long it has to last. No guess work involved.

In order to eliminate debt, you must consistently spend less than you make, not incur any new debt, and make payments towards reducing your existing debt. To do this, you need a spending plan or a budget. Maintaining a budget can be a daunting task- tracking purchases, manually recording transactions, balancing several different accounts, etc. The list goes on and on. In our near cashless society, it’s harder than ever to keep track of every purchase. It doesn’t have to be difficult though, by using advanced computer technology, it’s easier than ever to create and maintain a spending plan that will help you quickly eliminate your existing debt, and avoid incurring any new debt.

The best way to eliminate debt is using the Debt Roll-Down Method partnered with your Envelope Budgeting System. The debt roll-down principle works by determining the total monthly payment you can make toward debt repayment. Each time you pay off a debt, you add the payment for that debt to the monthly payment for the next priority debt. This will accelerate the rate at which this debt is paid. When the second debt is paid, you add the payment you have been making on this debt to the monthly payment for the third priority debt. This process is continued until all debt has been eliminated. The key is to continue making the same aggregate debt payment each month. Following this debt elimination principle can often assist you in eliminating all of your debt, including your mortgage, in as few as seven to eight years.

There are two ways to prioritize debt repayment: smallest outstanding balance to largest outstanding balance or highest interest rate to lowest interest rate. Because, in most cases, you will eliminate your debt faster if you begin with the debt carrying the highest interest rate, most financial advisors agree you should prioritize your repayment based on the interest rate—highest to lowest.

Traditionally, many people managed their money by dividing their cash into several paper envelopes. An envelope for food, entertainment, utilities etc. They then spend their money from these envelopes. They always knew how much money they had left, and how long it had to last. Today the best way to create and manage your Envelope Budgeting System is with the online budgeting system Mvelopes Personal. Mvelopes Personal is a breakthrough in budgeting and spending management that modernizes this same envelope budgeting concept using advanced Internet technology.

You can quickly set up your rapid repayment plan by following these steps.

STEP 1: Create a list of all debt.
The first step is to create a list of all debt. This list should include the name of the debt, the current outstanding balance, the planned monthly payment, and the interest rate for each. Begin with the debt having the highest interest rate and end with the debt having the lowest interest rate.

STEP 2: Check your monthly spending account allocations.
When you set up your monthly spending plan, you should create an envelope spending account for each debt on your list. Each month, you will make your debt payments from the spending accounts you have created. After you pay off the first debt, you will need to make an adjustment by adding the monthly allocation for that debt to the monthly allocation of the spending account for the next priority debt.

For example, let’s say your debt with the highest interest rate is a department store credit card. The amount of your monthly payment for this debt is $75, so the amount of income you allocate each month to the department store spending account for that debt is $75. Your next highest priority debt based on interest rate is a credit card. For this debt, your monthly payment is $125, so the amount of income you allocate to this credit card spending account each month is $125. After four months, you have paid off the department store debt. When you complete your monthly adjustment, you will transfer any remaining balance from the department store spending account to the credit card payment envelope. You also will adjust the monthly income allocation for the credit card spending account by adding the $75 to the $125. You will now be making a monthly payment of $200 on the credit card. This will be repeated each time a debt is paid off. Before long, you will have eliminated all of your consumer debt and will be making much larger mortgage payments.

STEP 3: Accelerate your debt payment with monthly spending account transfers.
Once you have created your debt-elimination plan, you can begin to accelerate your debt repayment by transferring savings from your spending accounts to your debt repayment accounts. Many people have found they can save an additional 10% each month by using an envelope system. If you have a net monthly income of $5,000, the additional amount you can save using the envelope system could be as much as $500. Imagine how quickly you can eliminate your consumer debt if you are adding 10 percent of your net monthly income to your debt payments.

For most people in America, a significant portion of their net monthly income is dedicated to the payment of interest. Imagine how much money you can save and invest if you are not paying interest. For most, this would represent several thousand dollars each year. Invested properly, this additional money may make a significant difference in the lifestyle you choose later in life. Using an envelope system to successfully implement the debt roll-down principle will help you accomplish this objective.

With Consumer debt at an all time high, it’s no wonder more and more people are looking for help with personal financial management, debt reduction and spending management. And given the substantial debt carried by the average family, it’s not surprising that Financial Freedom is at the forefront of the American mind – Among the top New Year’s Resolutions for2004 were increased savings, debt reduction, and increased investments.

• 63% resolve to save more money in 2004
• 51% resolve to pay off their debts
• 23% resolve to dedicate more money towards retirement

Following the steps outlined in the Debt Roll-Down method will put you on the right path towards eliminating all of your consumer debt. If you partner this with your envelope budgeting system like Mvelopes Personal, you too can reach financial fitness – regardless of your income level. The amount of money that you earn isn’t what matters, its how you spend the money that you do earn. You simply have to spend less than you make on a consistent basis.

9 Practical Tips to Stay Debt-Free This Year

By Steven B. Smith

There’s something magical about this time of year when everything is trimmed with tinsel and various shades of red and green.  But if you don’t have a spending plan for the holidays, you’ll likely end the year with too little green and deep in the red.

Here are nine smart tips to make sure the magic this year doesn’t result in a disappearing act by your bank account.

1. Create a spending plan now.  There’s no better gift you can give your family than financial stability.  Determine how much you can reasonably afford to spend this year, then determine how much to spend on each individual, not the other way around.  Don’t forget to include amounts for decorations, parties, and some of those ‘unexpected’ expenses. 

2. Track your expenses to stick with your plan.  If you wait until you get your credit card bill in January to see how you did with your plan, you’re almost sure to overspend.  Track your expenses using an online spending management program like Mvelopes Personal, or a paper-based envelope system or spreadsheet, to keep an up-to-date view of your spending.  Compare your actual spending to your plan often to make sure you stay within the limits you’ve set.

3. Set a deadline for paying off all holiday expenses.  If you charge $800 this holiday season, and then make only the minimum payment on that debt, it would take almost 11 years to pay off and end up costing more than twice the original price (assuming a minimum payment of 2.5% or $10 and an annual interest rate of 18%).  Mvelopes Personal (www.mvelopes.com) has a credit card feature designed to help set aside the money to cover purchases made with a credit card so you can pay the bill in full each month.  You don’t want to still be paying for the holidays next August.

4. Trim the list along with the tree.  In addition to trimming the tree this year, trim your gift list.  Instead of sending knick-knacks to everyone you know, send a thoughtful note expressing your appreciation for their friendship.  Spend the money you save instead to buy gifts for your closest friends and family or contribute it to your child’s college savings fund.

5. Send an e-card instead.  You’ll save on postage and stationery, and many e-cards include animation and music and even interactive games, making them more fun than their paper counterparts.  You can include a personalized message, and won’t have to worry about it getting there on time.  Try hallmark.com or 123greatings.com for fun, free e-cards.

6. Get creative with your gifts.  The best gifts require more thought than money.  Gather up some old photographs and frame them.  Create a digital photo calendar.  Give coupons for babysitting, a back massage, or a day free of changing diapers.  Refinish that old rocking chair.  Make a warm batch of your famous chocolate chip cookies, or record yourself reading a favorite story for a niece or nephew far away.  People will appreciate the personal touch and thoughtfulness of the gift.

7. Shop online.  You’ll save time, gas money and possibly your sanity as you avoid the crowded parking lots and long lines.  Many retailers offer free shipping for purchases over a certain dollar amount.  Have the item shipped directly to the recipient to avoid an extra trip to the post office.  Make sure you shop early to avoid paying expensive overnight shipping costs.

8. Step back to clear your head.  It’s easy to get lost in the hustle and bustle of the busiest time of the year.  Schedule some time to go ice-skating, see the lights, take a warm bath or enjoy a good book and a cup of hot chocolate in front of the fire.  Taking a step back can help you clear your head to avoid getting caught up in a frantic spending frenzy.

9. Give to charity.  One of the most common complaints about this time of year is that consumerism has hijacked the season.  The remedy?  Give to those less fortunate.  Giving to charity helps keep needs and wants in perspective during the holiday frenzy.  Give gently used clothing and blankets to a local shelter or the Salvation Army, or donate some time wrapping and distributing gifts for Toys for Tots or another organization.  It may help your children – and you – discover the real magic of the holiday season. 

Steven B. Smith is president and CEO of In2M Corporation and author of Money for Life: Budgeting Success and Financial Fitness in Just 12 Weeks!  www.mvelopes.com

By Steven B. Smith

Every January, millions of Americans determine to shed a few pounds and to finally get their finances in order.  Unfortunately, most estimates indicate that less than 30 percent of those well-intentioned resolutions make it through the year.  The reason most resolutions fail is because a plan is never laid out to help achieve the goal.  If you are serious about finally getting your finances in order this year, here are the three resolutions you need to make, along with easy steps to help you actually keep them.

 1.  Automate your finances.

Why it’s important:  If it’s not easy, most of us will quit before the New Year is a month old.  The key to effectively managing your money is tracking where it’s going, and how much money you have allocated for specific categories.  Paper and pen will do the trick, but be honest with yourself, do you plan on keeping that paper and pen with you for the next year, logging each and every purchase no matter how large or small?  The Internet allows you to track all your accounts with no manual effort, and will even do all the math for you.  If it’s automatic, you won’t get lazy, and you won’t forget to do it either.

Managing your finances online may also help keep your money safe.  According to a 2005 study on identity theft by the Better Business Bureau and Javelin Strategy and Research, “electronic monitoring provides greater safety by sharply reducing time to detection, and potentially eliminates the paper records and mail that are possible avenues to many identity theft cases.”

How to keep your resolution:  Set up a secure online budgeting system like Mvelopes Personal (www.mvelopes.com).  The subscription service will automatically track your expenses from multiple accounts and credit cards as well as provide you with balances of various savings and spending categories.  Seeing where you are spending your money will let you know where you can cut back.  Seeing your net worth rise in the net worth tracking feature will keep you motivated.  With a 30-day free trial, if you do give up by February, you can simply call and cancel.

Set up automatic transfers with your bank to pay your mortgage and other fixed payments to avoid missing a payment or incurring late fees.  Use online bill pay to save on envelopes, stamps, and time (Mvelopes Personal includes a free bill pay service, and most banks now offer bill pay for little or no extra).  Set up an automatic transfer to a savings or money market account once a month.  Find a high interest bearing account to maximize your savings.  Many online banks, such as EmigrantDirect, are currently offering three to four percent APY on savings accounts. 

2.  Stop paying interest and start earning it.

Why it’s important:  According to Bankrate.com, if you charge $1,000 on your credit card, and pay only the minimum payment (assuming an interest rate of 15 percent and a 2.5 percent minimum payment), it will take over 10 years to pay off and cost an additional $757.98 in interest.  Conversely, if you were to take only the amount you would be paying in interest each month on that loan and invest it in an account earning ten percent, it would grow to $1,594.92 over that 10 years. 

Even if you’ve gotten deep into credit card debt and can’t pay it off quickly, you can save a bundle by lowering your rate, and paying more than the minimum.  By dropping the interest rate on your credit card in the example above to 11 percent and paying only $30 a month, you could pay off that $1,000 in just over three years with only $198.85 in interest. 

How to keep your resolution:  Always pay at least the minimum payment on time, and if at all possible, pay your credit card balance in full each month.  Mvelopes Personal has a credit card tracking feature that automatically sets aside the exact purchase amount each time a purchase is made on your credit card to help you pay off the balance in full each month. 

If you are carrying a balance from month to month, cut your spending to a minimum and allocate all the extra money you can to paying off your debt.  Use the debt roll down principle to quickly reduce your debt.  Make a list of all your consumer debts and prioritize them in order of interest (highest to lowest).  Pay the minimum on all your debts and pay as much as you can on the one with the highest rate.  Once your first debt is paid off, roll that payment amount into the next debt on your list. 

Call your credit card issuer and try to negotiate a lower rate.  If they decline, let them know you plan to roll your balance to another card and cancel the card with the higher rate.  If your credit history is clean, you should be able to find a card with a 0 percent introductory APR.  Don’t make any purchases on the new card as often the introductory period ends as soon as you make your first purchase.  Be careful the interest rate doesn’t skyrocket after the introductory period, and make sure you cancel the card with the higher rate to avoid simply running up a larger debt load.

Check your credit reports to make sure they’re accurate.  The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.

3.  Stop procrastinating saving for your retirement.

 Why it’s important:  Time can be your biggest ally when investing for retirement.  For example, if you begin at age 25 and invest $4,000 annually in a portfolio that provides a 10 percent average annual return, then stop contributing after 10 years, your investment will grow to $1,365,818.31 by the time you retire at 65.  However, if you procrastinate investing until you are 35, then contribute $4,000 annually in a portfolio with the same 10 percent average annual return, and continue to contribute every year for 30 years until retiring at 65, your investment will only grow to $759,775.11.  Even though you contributed $80,000 more over the life of the investment in the second scenario, you still ended up with $600,000 less. 

How to keep your resolution:  Contribute at least enough to your 401(k) to get the maximum company match.  Talk to your HR department to find out the details of your company’s plan.  If your employer offers a company match and you are not contributing to your plan, you are essentially turning down a bonus every year.  And since your contributions are taken out on a pre-tax basis, as you increase your contribution, your taxable income decreases, meaning you pay less in taxes. 

Open a Roth IRA.  Your money grows tax-deferred, and just so long as the IRA has been open 5 years or more and you are at least 59 ½ when you start to withdraw, there are no tax penalties for withdrawal.  The maximum annual contribution increases to $4,500 this year. 

Make sure that no more than five percent of your portfolio for either your 401(k) or your Roth IRA is in a single stock.  Diversifying is the best way to ensure maximum growth over time while minimizing the risk and volatility of the market.  Select an index fund or target fund for an easy option that requires little oversight.  Fidelity, Vanguard and T. Row Price are among the largest purveyors of mutual funds and all offer excellent funds for a variety of investing styles.

From start to finish.  Regardless of where you stand financially, the New Year provides an excellent opportunity to review your finances and make improvements.  Make sure that this year you don’t just start fresh, but that you also finish strong.

Steven B. Smith is president and CEO of In2M Corporation