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What is an Envelope Budget?

What is an envelope budget? I asked myself that same thing a few years back. I’d heard people talking about it and I thought to myself, are they really using envelopes? Really just putting cash in them? Doesn’t this seem counter-intuitive to our digital society?

Well, guess what? They were right! It WORKS.

One of the hardest things about changing behavior is just that, changing the behavior. We do things out of repetition because we’ve always done it that way. And that’s where we get into trouble. How many of you spend small amounts of money every day, like getting coffee at Starbucks, or picking up a donut at the gas station? (maybe just my boyfriend? He says they’re good, but they look gross!)

Well, the envelope system aims to change that behavior. I tried this budget and believe me, it works great! It’s a little more work to set up, but so worth it.

It really makes you much more conscious of your spending habits and all the small things you’re wasting money on. It’s far too easy to whip out the credit card and just charge that $4.96 without thinking about it. But it adds up.

Studies show we spend up to $3200 on trivial things like coffee, cigarettes, eating out, etc.

All things that within reason are fine, but they’re little expenses that we don’t think much about, that add up to major spending by the end of the year.

One of the things that are great about the envelope budget is it aims to rectify this problem. Make you patently aware of every extra dollar your spending. It’s a simple process really, just follow a few steps.

Make a budget– Make a budget and figure out all necessary expenditures, like bills/payments that must be paid. Make an auto transfer of funds into savings/investment accounts. Whatever is left, is your discretionary income. Meaning, income that isn’t alotted to a category. Now if you’ve got debt, I’d suggest you put most, if not all, of this into paying off debt first.
Set Discretionary Amount– Give yourself a set amount monthly that can be used for discretionary income like eating out, going to movies, buying clothes, etc.
Divide that Amount– Divide that amount either bi-monthly or weekly
Withdraw Cash– Withdraw that cash from the bank
Create Envelope System– Create Envelopes and stuff with cash, either 2x month or weekly depending on preference and when paid.
Use Only Cash– Spend cash only. This can be daunting and tough for a lot of people. People tend to go one of two ways. They simply freeze up and don’t spend anything for fear of running out, or they spend it all within the first 6 hours. Guess which one I happen to be?!? Both are bad habits. It takes some practice and time to figure out what’s important and what’s necessary. A good rule of thumb is if you’re thinking of spending it on something like coffee, to wait about 20 minutes to see if it will pass. If not, to look around and see if you can make it at home or work without spending money. If you still have the urge, and I doubt you will, then go ahead and get the coffee. But keep good count, cuz within your new lifestyle changes you won’t be able to do it keep up the same habits. In order to make a change, you have to make a sacrifice and that’s tough.
Put Extra Cash Away– Now if by chance you are ending up with extra cash at the end of the month, put it towards something great. And by great I mean, put it into savings/emergency fund account, or add an extra payment to pay off debt. Chances are at the beginning you’ll spend every dime, and sometimes you’ll spend it quick. But after time, and changing some behaviors, you’ll end up with some extra money. Make sure to move that money to another account, and start fresh when you’re next cycle starts.

Change is hard, I get it. It’s hard for me too. The key to any large budgeting changes or lifestyle changes for that matter, is time, patience, planning, and small deliberate decisions. We are capable of change, it just takes some extra work and planning. Happy budgeting!

6 Ways to Survive An Audit

Dom dom dom!!! AUDIT! I said it, out loud. Trust me, it’s not like Beetlejuice, where if you say it 3x it shows up. We can talk about audit without that dreaded letter showing up.

When I got that letter last spring, I was like most people. I started sweating profusely, my stomach hurt, I was in a full blown panic attack.

What did they want from me? I don’t make any money? I don’t lie? Why are they doing this? I was a mess.

Then I called my mom. She quickly calmed me down, told me it wasn’t gonna be any big deal. So she said. I didn’t believe it, and was sure this was gonna kill me.

First I had to call them. That was the toughest decision to make. Just willing myself to pick up the phone and call them. Somehow I made excuses to do every other crappy thing on my to-do list I’d been putting off.

Wash the cat? Done. Clean the yard up of dog poop? Done. Get the oil changed? Done. Clean the baseboards? Done

So there I was like a week later, still hadn’t called, just sweating as I picked up the phone and dialed.

And you know what I found out?

The IRS is full of just regular folks doing their job. Folks like us. I talked to Eric, my trusted IRS partner, where we set up an appointment and he advised me of the things I needed to bring in. I was scared of the appointment but relieved that he didn’t sound like a jerk, and didn’t tell me I as horrible and would soon be wearing an orange jumpsuit.

So I gathered all my info and went to meet him a few weeks later. He was a super nice, a family guy with young kids, very easy to talk to, and very helpful. I asked him lots of questions since I’m self-employed and we went over things.

I was extremely grateful that I had done my excel sheet with all my expenses because it made it quite easy to show him where my write-offs came from. He informed me that I needed to make them a little bit more in depth, which I agreed to do, and we set another appointment for a month away.

I did as he asked and met with him again in a month to drop off my paperwork. Now my case is simple, I didn’t make much, and I didn’t have any huge red flags to go over. My meeting with him was always 30 min or less. He told me it would be a few months and he would have my results.

I met him about 3 months later to go over what he’d found. There were a few discrepancies, nothing major, no fines or huge totals owed. I set up a payment plan and Poof! It was all over. Just like that.

Yes it was stressful, yes it took some time, but no, it didn’t kill me. Here are some great tips to make your auditing experience easier and smooth.

taxes, paying taxes, audit, how to survive an audit — 6 Ways to Survive An Audit

Don’t Ignore the Notice– Remember that part where I kept putting it off cuz I was scared. Well, that’s all fine and good, but I did call before the date on the form. If you ignore it altogether, don’t worry, they’ll find you. And it won’t be pretty. Just make the call and the appointment. It’s much easier than dealing with the repercussions of ignoring it.
Don’t Lie– Whatever you do, don’t lie to the Federal Government. They are fully expecting to find mistakes on your taxes, heck that might be why you’re there. Things that are general mistakes, or assumed that you didn’t have the knowledge, made a clerical error, or just didn’t know, aren’t going to get you into trouble. I didn’t know that I couldn’t write off 100% of travel food expenses. It wasn’t a big deal, he just did an adjustment, and I learned something new. Lying will only make it worse, and lead to potential larger fines and even punishment.
Organize Your Records– When you talk to the IRS agent, he/she will tell you what they’re looking for. What year(s) they need to look at. If you’re a terrible bookkeeper and it’s a mess, don’t be afraid to tell them. They will give you time to put together your stuff. And if you don’t have it, start re-creating the records. I didn’t have receipts for my travel records. I was terrified about this, as if he was going to berate me, for such stupidity. Luckily, every expense I wrote off, was on my business bank account records. I spent an entire day, making lists of each expenditure and totally them up for each month. Time-consuming? Yes, but not impossible. Don’t panic, most stuff we can re-create and even find among our paperwork
Be Nice– This goes without saying. I had heard horror stories of mean, horrible agents. But that wasn’t my case. He was friendly, professional, and easy to deal with. Which is exactly how I was to him. He told me horror stories of dealing with difficult people and it’s a shame because they’re just doing their job. Besides what’s the statement, “you catch more flies with honey?” Just be nice and respectful and chances are you’ll be treated the same.
Bring Copies of Documents– There will be paperwork, lots of it. But just bring copies. Chances are you won’t be receiving any of your paperwork back, so make sure and bring copies. Keep track of what’s been submitted and what hasn’t. I ended up making an excel sheet, (yes, you know I love excel) and making a list of things I needed to get, along with a check mark when I submitted it. Organization is key to a good audit.
Consult an Attorney– if you run a substantial business, have failed to pay taxes, or have complicated tax issues, please consult an attorney. They can give you constructive advice on how to proceed, let you know about possible fines, and direct you in your search for documents and info. And you can hire an attorney to handle the entire situation for you. I wish I’d had that option, but I didn’t since I couldn’t afford it.

My biggest wish at the end of this article is that you realize that being audited isn’t the end of the world. Is there a chance they’ll find a mistake(s) or you’ll owe extra money? Sure. Are you going to be ordered into the orange jumpsuit at your meeting and taken away without saying goodbye to the family, probably not? While it’s certainly can be a trying time, you’re simply going thru something that almost every person will go thru at one point in your life. Take a deep breath and breath deep, cuz it’s gonna be ok.