As far back as I can remember, my parents had specific guidelines to teach me the purpose of budgeting. Each month, I received a specific allowance based on some mysterious calculation involving how old I was, multiplied by four and finally divided by the circumference of the sun or something.
These guidelines didn’t stop at the amount of allowance they gave me; they also involved how I used it. My parents gave me a very important red folder, and inside the folder were four envelopes into which I allocated my money. Be it allowance, Christmas, birthday - all of my money as a kid was divided into either “Spending,” “Giving,” “Saving,” or “Saving for a big item.”
Back then, when getting $20 for Christmas was a big deal and all of my money was in cash, this was a great system. But what about now? I can’t exactly empty my bank accounts and put everything in a red folder in my desk drawer. All the same, the concept of the little red folder is a standard I want to live by and a good way to save money.
A Peek Inside the Little Red Folder
1. Saving for a big item: This means short term goals. A few years ago I didn’t have this envelope in my life, and as a result it took me almost two years to save up for my DSLR. Having that money mixed in with my regular savings or checking account made it hard to keep track of. Some got spent here and there, so the process was dramatically slowed down. Had it not been for this, I think I could have bought my expensive gadget in 6 months. Thanks to ImpulseSave, I have that envelope back in my life and can reach my goals faster.
2. Saving: This is long term. Whether it be retirement or saving for a rainy day, it is important to have savings for down the road and to build an emergency fund. I’m sure 10-year-old me wasn’t thinking about what putting that $5 into the savings folder would mean then, but 21-year-old me is glad to have that cushion now.
3. Giving: I think that adding giving into a budget is often overlooked, but I feel it is as important as any of the steps. Portioning part of your income to giving 1. is a great way to regularly help others and 2. helps us take the time to look at others’ needs and to stop worrying about money. I make it a goal to give at least 10% of my income. As Dave Ramsey says, “If you can’t live off 90% of what you make, what makes you think you can live off 100%?” Figure out what is feasible for you, pick an organization and start giving!
4. Spending: This one is the “everything else” category of money, whether it’s money that you have to spend (like to pay off student loans early) or money you want to spend (like on a new gadget!).
By keeping your money in their proper “envelopes,” you will stay organized and reach your goals faster. So go ahead and create an ImpulseSave goal for that big item you want or that emergency fund you need. Watch the savings add up and be proud of yourself as you get that much closer to reaching your goal!
Do you have any specific steps for budgeting? Let us know!