If you visit personal finance websites (see our top 50 favorite personal finance sites) chances are you’ve come across the term “envelope system.” This is a popular way to help people who want to reduce their debt or simply get a handle on their spending. In its purest form, you take your paycheck, cash it, and divide your cash into envelopes according to budget categories. For example you would have an envelope for bills, food, eating out, gas, and so on.  When spending in any of your envelope categories, you turn to the envelope and draw out the cash you need to cover your expenses. If you find your envelope empty before your next pay period, you then would not be able to spend any more in that budget category and you would NOT borrow money from any of the other envelopes. What this system does is force you to stay within your budget by category and hence stay within your overall budget. It makes you think about spending because you actually handing over hard earned cash so in theory you should think twice about your spending.

Of course, it’s hard to pay bills in cash without having to visit the payment offices of your gas, water, sewer, electric companies, and sometimes these aren’t even local to where  you live. They also may not accept cash payments in the mail, and besides, it certainly isn’t wise to mail a lot of cash in an envelope. Thus, it’s highly likely that the majority of people who rely on the envelope system pay their bills online through an ACH transfer out of a bank account, or with a debit card or credit card account number. They only use the envelope system for food, eating out, and other purchases that you would make at a cash register in a store.

Here’s the biggest problem we see with the cash envelope system. It’s risky to carry a lot of cash. If you cash your paycheck at a check cashing service, you will pay a check cashing fee (versus paying no fee for direct deposit to a bank account or prepaid card account).  You might get robbed walking away from a check cashing place or at any point on the way home. Your cash stash might get stolen by anyone who discovers it in your home.

Finally, some personal finance gurus argue that using cash actually makes you spend more. If you have three twenties in your pocket, a $5 ice cream cone is in easy reach as a spontaneous purchase, but you may resist that cone if you thought about putting it on a credit card or prepaid card, just because it’s a small purchase put on plastic, and some merchants frown on that due to the swipe fees they pay.

Virtual Envelope System

Now imagine that you are using some budgeting software. Today there are many to choose from, or you can even set one up yourself in a simple spreadsheet. You set your budget categories in your electronic budget system. Your starting point might be historical spending going back a year or six months. It’s easy nowadays to download your transaction history from your checking accounts, credit card accounts, and/or debit card accounts. Then import that transaction history into your spreadsheet or budget software. Budget software can even show you your spending categories in a nice pie chart view, or  a table that may help you recognize patterns such as overspending immediately after payday.

Next, like the real envelope system, you divide your savings balance among your different categories. Then—and here’s the harder part with this digital system—you have to have the discipline to not go over your spending limit in each budget category or “virtual envelope.” How do you do this? By checking your budget spreadsheet each time you go out the door, so you know where you are for that category. Say, your “monthly MP3 budget” is $10 and you see that you’ve spent $10 last night downloading ten songs on iTunes, then you can’t buy any more MP3s until next month.

How debit cards make this easy is that you rely on them for all your spending. Avoid your credit cards (because you are likely trying to pay them down). Then, when you download your transaction history, all of that data will flow into your various spending categories automatically.

With a debit card you might lose it or get robbed but your money can remain safe. You have eliminated the risk of carrying cash. You will hopefully think twice about using your plastic for small spontaneous purchases.

With either system, you should soon learn the fine art of budgeting and be on your way to financial well being.

The first step in reducing monthly expenses is to look at the last three months of your expenses and break it out into categories of spending. You can now use a number of budget tracking websites to help you do this very easily, such as Mint, Wesabe, and JustThrive. These sites let you import financial data from your bank accounts to make things easy.

Next, figure out your main budget categories and where you can cut back spending in each of them.

Cut Necessary Spending You Can Micromanage

The easiest category to chip away at is necessary spending that you control on a purchase by purchase basis. Think grocery shopping. You can easily swap an expensive item (steak) for a cheaper item (ground beef), or cut out items all together (ice cream).  The same thing goes for clothing purchases. To some extent, switching retail environments can help here. For instance, shop at Old Navy instead of the Gap, or for serious saving, shop at garage sales and used clothing stores. Shop at outlet malls instead of trendy malls.

If you commute, consider alternatives, like biking to work, or ride sharing. Or even telecommuting.

Cut Contracted Spending

What is harder is to cut are budget areas where you have contracts in place, like child care, lawn care, phone, cable, etc. Some contracted spending you have to have, like utility bills. The way to cut these, as you no doubt know, is to try and use less energy. Replace light bulbs with more efficient compact fluorescents. Turn of lights when leaving rooms. Wash clothes with cold water instead of hot. Turn down the thermostat. And so on.

Some contracts you can reduce. For example, you can reduce the number of channels you get on a cable or satellite dish to bring down that monthly bill. If you use a lawn care service, or other types of services, ask if there is a lower service level. Maybe you are at the Gold standard level where Bronze will do.  You can also eliminate some contracts all together, like TV and lawn service. Some you may not be able to eliminate, like child care.

One trick is to pay contracted or monthly bills more frequently. You might not save money, but you are less likely to miss a bill payment altogether or bounce a check (which can cost you money). On something like car insurance, where odds are you break up a sixth month bill into monthly bills, you are paying a convenience fee or interest. If you can pay the whole bill in one lump, you will save on those fees.  Finally, it is also possible to negotiate a lower rate all together. Or switch to a new provider with a lower rate. Often, when it comes down to the wire and you threaten to leave a provider to get a lower rate, your current provider manages to find a lower price for you, either by just cutting the price, or adjusting what you get for what you pay.

Find out if you save money by bundling some services such as phone, cable, and Internet. Or car insurance and home owners or renters insurance.

Cut Purely Discretionary Spending

You might be surprised to see when you break out your spending how much of it goes towards Wants instead of Needs.  A want is anything you can live without–and don’t say “I can’t live without my $5 Starbucks Grande Frappucinno every day.  One way to reduce discretionary spending is to simply keep less cash in your wallet. Or avoid whipping out your credit card for spontaneous purchases.

If you really need that vacation this summer–and who doesn’t–plan ahead for ways you can have fun that don’t cost a lot of money. Hike instead of renting expensive equipment like jet skis. Buy snacks or even meals at the grocery store instead eating every meal at restaurants. Or choose a destination where you can stay with friends or family instead of a hotel.

Cut out Savings…Not

We don’t recommend this. In fact, if you make cuts in all other areas and you aren’t saving for your retirement, or school, or other worthy and important goals, shift some of your budget cutting saving into actual savings.

It is okay to splurge every once in a while. After all, life would not be very enjoyable if we could not let ourselves loose every once in a while. We also need some form of reward for all the hard work we have been throwing ourselves into. We have pointed out some time before that splurging is very different from overspending. If you find yourself compulsively shopping more often, buying something not because there is a need but simply for the sake of buying it, than you had better watch out especially if you use a credit card as your main payment option. Excessive overspending can lead to credit debt. And as we always say, credit debt is a nasty trap we do not want to get ourselves pulled into.

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Photo by kirstiecat

It’s only the start of spring, and already people are looking at matters meant for the fall. That’s when a new semester of college starts anew, and when people start thinking about how they’re going to pay for it. An estimated 70% of all students in the United States are able to study in college thanks to various grants, student loans and scholarships. These people end up becoming the future workforce of the nation, and some rise to become captains of industry.

Yet, the future is not always bright for these students. The average cost of a college education for public colleges is about $4,081 annually. For students who enroll in private schools, the figure is steeper: $18,273 a year is what students need to pay.

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photo by Markies

Yes, it may sound strange, but we know there are some people who have never tried shopping online. This is in the face of numbers from the United States Census Bureau from 2008 indicating how e-commerce accounted for $93,280,000,000 of all total retail done in America, equating to around 2.5% of all major sales transactions. There are also figures from Nielsen that estimate that over 875 million shoppers worldwide go online, and that number is pegged to rise sharply in the future.

This rise in popularity is owed to the benefits that shopping online provides people with, especially those who are looking for very specific kinds of items or gifts. Yet there are still thousands who have not engaged in online shopping, and they have their reasons. Identity theft, money security and credit card fraud all come to mind when discussing the perils of buying online. This doesn’t include worries over shipping and product damage, or items that no longer suit their owners, such as clothes or shoes with sizes that don’t fit.

Never bought anything online? Here are a few points for people to remember:

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photo by Ryan Yessman

The cold winter months are finally over and its time to celebrate. For schools and universities across the country, the arrival of spring means it’s almost time for one of the most highly anticipated events in a college student’s life: Spring Break.

Before you spring for that all-inclusive hotel package or special Spring Break travel deal, plan ahead and look around at your options. One of the biggest party poopers is learning too late that you spent too much on a vacation that wasn’t worth the splurge. It takes a lot of diligence and discipline to save up your money. A post-break hangover is fine, but coming home flat broke is another matter entirely.

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Nothing can unleash your hidden creative and mushy tendencies more than Valentine’s Day. Every year, as the Day of Hearts draws near, you along with couples from all over the world start racking your brains for the perfect date ideas for you and your special someone. It would have to be romantic. There should be no slip-ups. And it should always end with the sweetheart more in love with you than ever. So you free up your schedule for the day and make a mental list of ideas. And then you hit a slump. The reality of the matter is that a budget must be allotted. Now the question is how can you plan the perfect Valentines date, without burning a hole in your wallet?

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Oh look, it’s February already! It has been one whole month since the New Year started. Allow us to ask you a simple little question you may or may not want to hear: Have you started fulfilling your New Year’s resolutions yet? Don’t worry, this is not a scolding, and we won’t judge you if you answered ‘no.’ As always we are here to help. If you are part of the majority of New Year’s resolution makers who have vowed to shed some pounds or save more money by the end of the year, here are a few simple tips that can help you do both. The only effort you need to take is discipline.

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Photo by alvy

Most of you reading this must surely remember an older, simpler age. That was a time that mobile phones were massive bricks the size of a shoe, or how a computer disk was a flat square of plastic that could bend like a paper plate. We’ve gone through leaps and bounds since then. Some of the ideas previously only seen on Star Trek – face-to-face video conferencing, mobile telephones, and touch-screen technology – now all exist in real life. They make our lives worlds more convenient. They let us do things, such as take photos and share them with friends, with just a few button clicks.

Yet these things aren’t cheap. It’s been about a week since Apple announced the upcoming iPad, which starts at a price of $499. Everywhere, people still haven’t stopped debating on whether or not it’s worth it. Other companies are talking about their own answers to the machine, eliciting their own levels of interest and curiosity. Yet, all of this arguably raises more important questions: “Do I have to buy them?,” “Are they worth it?,” and “Where can I get them cheap?”

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There are those who say it’s totally lame to shop during end-of-season and off-season sales. Why would you want to buy a shirt you can’t use until a few months later? By then, the trends would have changed, and you would end up wearing brand-new clothes that are just a year too late.

Contrary to consumerist belief, though, trends are not as fleeting as they present themselves to be. You can save a lot of money when you shop for clothes that are not in season. Of course, we are not saying you should not keep up with the latest fashion trends. It is always great to have a bunch of trendy items in the wardrobe. There are some outfits, however, that we can get at just a fraction of the cost when we shop for them at off-season sales. For the clothes that you tend to use a lot of, you can opt not to buy them when they are still fresh off the new releases rack.

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