I’ve listened to you for a little while now, but I was wondering about the envelope system you recommend. How does it work, and how much do you suggest saving for emergencies?
The envelope system is simple. It’s just grandma’s old-fashioned, common sense way of budgeting money.
Back in the old days when people were paid in cash, they would take their money and divide it up in different envelopes. These envelopes represented the different categories in their budgets — food, clothes and whatever else they needed. When a particular envelope was empty, they stopped buying that particular item because the money budgeted for the category was gone. So, if you wanted a shirt but the clothing envelope was empty, you didn’t buy the shirt that month. It’s just a simple cash system that keeps you from overspending.
Today, we don’t use it that way for every single category, but it’s always a good idea to at least use it for food and clothing. These are two areas where most people tend to bust their budgets.
A fully funded emergency fund is three to six months of expenses. So, if your total monthly expenses are $2,000, you’d need between $6,000 and $12,000 in your emergency fund. Think of it as your rainy day fund, Dale. You’ve heard the old saying, “Into every life a little rain must fall”? Well, the emergency fund is your umbrella and protection in these cases.
Trust me, if you live very long you’re going to have some rain in your life. And your emergency fund will keep you from getting soaked.
I’ve been trying to help my sister figure out her financial situation, and it’s a real mess. She makes good money, but she has a lot of debt. At what point to you recommend bankruptcy?
I tell people to file bankruptcy about as often as I tell them to file for divorce. In other words, I don’t. Like many of the divorces today, most bankruptcies are the result of people just giving up.
If your sister is asking for help, she’s probably feeling hopeless and overwhelmed already. When you sit down with her, get her to step back from the situation and think logically, not emotionally. She may have to sell some things or take an extra job to make this work. Living on a very strict, written, monthly budget will be a must!
But make sure she takes care of necessities like food, shelter, clothing, transportation and utilities first. She may take a few dings on her credit along the way, but in most cases you can map out a plan to get caught up and be financially on your feet again in two or three years.
Her finances may be out of control, but chances are she’s not bankrupt. It may take a little while — along with a lot of hard work and going without things she’d like for a time — but you should never file bankruptcy over a problem you can solve in two or three years.
Walk her through it, Jamie, and be there for her. Most of all she needs a plan and the hope that goes with having one in place!
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