Do you think creating a budget is a waste of time? Think again. An operating budget is an essential management tool for all small business owners and should not be ignored. You probably spend most of your days putting out fires. Here's why an effective operating budget can eliminate a lot of that stress in your life.
How It Works
1. Determine Your Discretionary Income
Before you start the envelope system, determine how much you have available after you pay your bills and put money aside for savings and investments.
2. Decide on a Budget
Once you know how much money you have left, decide how to divide it among the different budget categories in which your monthly spending varies. Some examples of common categories include: groceries, household items, entertainment or dining out, clothing, gifts, gas, and allowance (to be spent as fun money).
3. Create Envelopes and Stuff Them with Cash
Get an envelope for each category and write the category name on the front. Then, after each paycheck, put in the budgeted amount of cash.
4. Spend Cash Only
Once you run out of cash in an envelope, you have met your budget for that pay period and are unable to spend any more in that category until the next pay period.
5. Pay Off Debt with Extra Money or Save It
If you have any debt, use the money left over from your envelopes to pay it off. If you do not have any debt, put your extra cash into savings.