I’m a planner. Always have been. I can’t stand going out to dinner without having a reservation. And I haven’t gone to a grocery store without a list in several years. I’m the same way when it comes to money. If you’re not saving and budgeting your money carefully, you’re vulnerable to life’s curve balls. Here’s how you can use the Envelope Plan to manage the rocky financial terrain…

Divide And Conquer

First, you’ll need a dozen envelopes. Next, identify the ways in which money gets sucked away from you each month. This can include your mortgage payment, car payment, water bill and any other monthly expenses. Now, identify other areas in which you spend money. For example, how much do you spend on entertainment each month? How about food and clothes? You’re going to use one envelope for each expense. Write the name and amount of the expense on the envelope.

How Much Money Is Coming In?

Take a look at how much money you’re making each month. You’re going to allocate a portion of that amount to each of your expenses. Each time you receive money, divide it and place a portion into each envelope. If you’ve planned properly, all of your bills and expenses will get paid each month.

Reality Check

The great thing about using the Envelope Plan is that all of your inflows and outflows are categorized and detailed with hard numbers. There’s no ambiguity. Often, it forces a reality check. If you notice that the money you’re making isn’t covering all of your expenses, you have a problem. You’ll either need to make more money or cut back on some of your expenses. For example, if you’re $100 short each month, but you’re spending as much on entertainment as you are on your mortgage, cut back a little (or ask for a raise).

The Envelope Plan removes the mystery and helps you budget your money. Plus, if one of your envelopes is marked “Savings,” it can be a fantastic platform to start amassing an emergency fund. If you’re baffled by money shortages each month, give envelopes a try.

How many times has that thought skipped across your mind when you’re in a buying mood? When we see something we want, we don’t want to wait to get our hands on it. We want it now. For some people, it’s clothes. For others, cars. Still others feel their hearts race with desire for the latest gadget. Each of us has our respective vices. Sadly, a lot of folks willingly rip their credit cards out of their wallets before the store clerk can even mutter, “cash or charge.”

That’s called the pursuit of instant gratification. And it can devastate your budget and your personal finances. Here are its two biggest dangers…

The Spectre Of Growing Debt

Some of you may not remember a time when credit cards didn’t exist. I do. When I wanted to buy something, I saved for it. And while the wait nearly killed me, I never had to deal with credit card debt. Most people can’t afford to buy the things they want. At least, not immediately. So, they charge it. The problem is that their credit card balances start growing. They may have the clothes, cars, and gadgets that make them happy. But, the shadow of credit card debt looms in the distance.

Believe it or not, some people have credit card balances in excess of $40,000. It’s not from emergency medical expenses. It’s usually from an insane need for instant gratification. Look around their house and you’ll probably see the evidence. Three huge plasma screens, four laptops, an iPhone… you get the picture.

Paying More Than It’s Worth

There’s another danger of instant gratification: paying more for an item than it’s worth. When you charge something on your credit card, you end up paying interest on the charge. For example, let’s say you buy a $300 iPhone. You use your credit card that has a 19.8% interest rate. Because writing a check is no fun, you end up paying the minimum of $15 each month. It will take you 24 months to pay off your $300 iPhone. In that time, you’ll spend $360. As your iPhone loses value, you’re actually paying more for it.

Kinda silly, don’t you think?

Those are the dangers of instant gratification. If you want something, save for it. It won’t kill you. You might even notice that it loses its appeal over time.

Everyone makes stupid mistakes with their money. I’ve done it more times than I’d like to admit. You’ve probably made a couple of mistakes yourself. They rarely make sense. And even if they’re justified, they’re still hard to swallow. Today, I’m going to highlight 5 stupid money mistakes. I’m guilty of a couple of them, but you’ll have to guess which ones.

#1 - Credit Card Balance

You should be paying off your credit card balance each month. That way, your credit card company won’t have the chance to pillage your savings with their insane interest rates. Emergencies happen, of course. When they do, it’s not always possible to pay the card off immediately. That aside, do everything you can to retire the debt. Remember, you’re just hemorrhaging cash.

#2 - Bounce A Check

C’mon. There’s really no reason for doing this. First, bouncing checks is expensive. The fees can be outrageous. Second, if you’re using a budget and you’ve set aside an emergency savings fund, you have the money to pay all of your expenses. Bouncing a check becomes a simple organizational issue. And an expensive one, at that.

#3 - Finance A New Car

The scary thing is that financing a new car is a societal expectation. That is, we’re raised to believe that it’s normal. But, think about that for a moment. You’re borrowing money to buy a depreciating asset. You’re saddled with monthly payments that could otherwise be allocated toward building your savings and investment portfolio. Another stupid money mistake. Sadly, even savvy savers do this.

#4 - Taking A Payday Loan

The only reason you should consider a payday loan is to get quick access to cash for an emergency. But, you’ll pay for the privilege. The interest rate is so high, some of these outfits have padded floors for customers who faint. We’ve talked before about the importance of having an emergency savings account. If you find yourself taking a payday loan, you’re doing something wrong with your personal finances.

#5 - Do Anything To “Buy” A House

At first, it was entertaining. Then, it became downright depressing. During the past few years, people were so desperate to get into a house that they agreed to terms that any sane person would consider, well… insane. No down payment, variable interest rates, interest only payments and other financial shenanigans helped pave the way for millions of foreclosures.

The goal is to slowly build your personal wealth. Aside from winning the lottery, that means making good decisions with your money. Budgeting, saving, having an emergency fund, adding to your investment portfolio… these are the things that will help you become wealthy down the road.

The Dark Underbelly

When someone buys a brand new car, they don’t attach a sign that explains how they paid for it. The same is true for vacations, home renovations and even private school tuition for their kids. The fact is, most people are deeply in debt. Few have the financial resources to walk into a car dealership and pay $50,000 upfront for that shiny new SUV. Instead, they finance it. They put their vacations on their credit card. They take out a home equity loan for home improvement projects.

The Joneses aren’t all they’re cracked up to be. They may have a lot of nice things. But, chances are, they’re a few paychecks away from selling pencils on the corner.

Using Good Judgement

Trying to keep up with the Joneses is a sure way to financially bury yourself. The worst thing you can possibly do for your savings is to go into debt buying things you don’t need. You’ll end up paying an exorbitant interest rate for items that lose their sparkle almost as quickly as they lose their value. Plus, doing so siphons the money that you would normally set aside for savings and investments. Not only are you paying high interest for questionable excess, you’re sacrificing the earnings that result from compound interest.

That’s a losing trifecta.

Getting The Last Laugh

So what if your neighbors have nicer cars than you? Who cares if they’re enjoying lavish European vacations while you’re stuck at the lake? Remember, the likelihood that your neighbors are actually paying cash for those indulgences are slim. What’s more, their savings and investment portfolio is probably nonexistent. The best way to respond to your neighbors’ not-so-subtle excesses is to smile, nod your head and say, “Nice boat, Frank!” Meanwhile, you can be confident that while they’re amassing loads of consumer debt, you’ll be sticking to you goal of budgeting, saving and building long-term financial independence.

Screw the Joneses!

Many people signup for a checking and savings account with one bank and never even consider the idea of opening an account with another bank. Those that are daring will possibly open an online savings account in addition to their traditional account. So, why do many people choose to have only one bank account? My belief is that people were like me and assumed that only those with LOTS of money need multiple bank accounts. Disagree? Continue reading and you will understand why you should have multiple bank accounts.

Identity Theft

If someone was to “steal” your bank’s credit/debit card and spend a good chunk of your money, what would you do? Normally banks take longer to resolve such issues than credit card companies. In the meantime, you are out of your hard-earned cash. If you have money spread across multiple accounts at least you would limit the liability a criminal could cause from a lost or stolen bank card. Individuals frequently use their bank’s credit/debit card for common purchases such as gas or groceries and this increases your chance of identity theft.

Bank Failure

With the high number of recent bank failures, having multiple bank accounts helps me to sleep well at night. While no one expects their bank to fail, recent trends have shown that even major banks are susceptible to failure. Sure Hopefully your money is FDIC insured, but do you have any idea how long it would take for you to receive your money after a bank failure?  I cannot answer that question either, but with multiple accounts I am better protected than most.

Bank Errors, Multiple Options

Rarely do I have an issue with a bank error, but it does happen. Today while driving my mother to the bank, she told me a story of $400 “disappearing” from her account one time. Even with repeated calls to customer service and speaking with several bank managers, the bank took approximately 6 weeks to resolve the issue.

Having multiple options is a great idea (except maybe in relationships) and just because customer service and your banking experience is great today does not mean that the same will hold true tomorrow. Multiple bank accounts give you the option to move the majority of your money to another bank if necessary.

Conclusion

Managing multiple bank accounts is not as difficult as some would assume especially with the ability to manage your accounts online. Transfers between your accounts take no more than a few mouse clicks. You can even have your employer split your direct deposits into multiple accounts. Some things in life are worth the extra effort and this is one of them. Remember the saying, “Never put all of your eggs in one basket”? The same holds true for bank accounts. Never put all of your cash in one bank.

I live and breathe by my monthly budget. If I stray off the plan, I drag myself back on track. I’ll explain the benefits in a moment. If you’ve never created a formal budget, we’re going to fix that today. Here’s the Quickie Guide to budgeting your money…

Step #1: Add Up Your Outflows

Make a list of your monthly bills. Then, add other expenses such as food, gas and going out to dinner with friends. Include hobbies, medications and anything else that you expect to spend money on each month. Don’t forget to include a certain amount for savings and emergencies.

Step #2: Add Up Your Inflows

Usually, this simply means your paycheck. But, it can include alimony, workers compensation and anything else that brings money into your coffers.

Step #3: Subtract Outflows From Inflows

Ideally, you’ll have money left over. If you’re in the red, you need to change something in your budget. Otherwise, financial disaster is in your future.

Step #4: Planning For The Future

Besides monthly bills and expenses, you’ll probably have major expenditures that you’ll need to plan for. It happens to all of us. Maybe your car is making sounds that signal its death throes. Maybe your daughter is getting married at the end of the year. These are the “gotchas.” They sneak up and devastate your budget unless you plan for them and set aside money each month.

The Benefits Of Budgeting

When you budget your money carefully, you never have to worry about coming up short. As long as you’ve projected your inflows and outflows realistically, you’ll never need to stress. Plus, if you’re setting aside money for savings and investments, your budget allows your assets to grow over time.

My budget has been singularly instrumental in helping me to achieve a level of financial success. By creating a formal monthly plan, you can accomplish the same thing while having that delicious peace of mind that millions of people lack.

But, what if a monthly budget isn’t enough? What if, despite your best estimates, your budget is crushed and your savings get wiped out? It happens more often than you think. And that’s why you need to start making an annual budget.

Our Tendency To Plan Poorly

I’ve always used monthly budgets and they’ve saved my financial skin more times than I can count. But, I learned the hard way that annual budgets play a key role in making realistic estimates of expenses throughout the year. Here’s why…

Most of us think of spending in terms of how much money we make and spend each month. There’s nothing wrong with that. It’s the foundation of budgeting. The problem is that it leads to bad forecasting. We tend to forget about - or ignore - major expenses until they’re looming in front of us. For example, how many people do you know who actually begin saving for Christmas presents during May or June? I’m guessing not many. That’s why credit card balances always skyrocket after Christmas.

Keep in mind that a lot of those people who are struggling to pay off Christmas credit card purchases use a monthly budget. They just failed to plan on an annual basis.

Plan Your Year

If you create an annual budget, you can start planning and allocating money for big expenses well in advance. Christmas, birthdays, family vacations and major home renovations can be addressed early so you can avoid nasty surprises. For some reason, the people I know tend to be overly optimistic about their expenses. This will give you a more realistic view of how much money you’ll truly need throughout the year.

Should you stop using monthly budgets? Are they a waste of time? Of course not. But, you should consider them a component of your annual budget. Identify all of your expenses during the year. Make sure your spouse isn’t “forgetting” to tell you about an upcoming bill. Divide each expense by 12 and start putting money away for them each month.

When Christmas rolls around, you can leave your credit cards at home.

The Pros

First, the yield is much higher than traditional banks. It’s not uncommon to enjoy an interest rate that flirts with 4%. Compare that rate to your traditional bank where they expect you to gush with praise when they offer you a .50% APY. Second, you don’t need to keep a minimum balance in your online savings account. My local Bank of America lops off $3 a month if the balance ever dips below $300. By contrast, your online bank won’t charge you a fee.

Third, access to your money is easy and quick. They’ll give you a debit card that you can use to tap into your account at stores and ATMs. Plus, you can transfer money directly from your online savings account into your checking account whenever you like.

The Cons

Online savings accounts aren’t perfect. They have drawbacks. Since I promised a balanced approach, let’s talk about the disadvantages. First, you won’t have the chance to talk with bank tellers. If your local bank teller is the only exposure you have to the human race, this could be disastrous. Of course, if you’re desperate to hear a human’s voice, you could call your online bank’s 800 number and make up a question or two.

Second, depositing checks into your account can be cumbersome. Some online banks will allow you to mail your check to them for deposit (since there are no branches in which to make the deposit personally). Frankly, it’s more convenient to deposit your checks into your traditional checking account. Then, just transfer the money to your online savings account. It only takes a few mouse clicks.

The Verdict

You already know I’m a fan of online banks. They’ve eliminated most of the overhead that traditional banks struggle with and then pass those savings along to us. But, I understand that we’re all different. If you need to talk with bank tellers to remain sane, stick with your local branch. However, if you like earning higher interest on your savings, it’s time to consider making the switch.

Having a budget and actually putting it to use is one of the most important things you can do to take control of your personal finances. But, let’s assume you’re still not sold on the idea. For your enjoyment and edification, here are 4 reasons why you need to start budgeting right now…

#1 - Avoid Money Problems

I don’t know about you, but I have a few friends who stress over money each month. They make enough to pay the bills, keep their bellies full and enjoy their respective vices. But, for some reason, when the car payment is due, they start panicking. When you use a budget, the money is already allocated. No stress, no mess.

#2 - Eliminates Uncertainty

Your budget allows you to know exactly how much money you need to survive each month. Plus, you always know that the money is there. A lot of folks go through the month without knowing how much money is in their checking account or what bills are coming due. That’s no way to handle your finances. If you want excitement, go skydiving.

#3 - Breaks The Overspending Habit

Think about where your money goes each month. If you’re not on a budget, I’m willing to bet the amount of money you spend is dramatically higher than the amount you need to spend. What’s worse, you can’t account for it. The problem is that nearly everyone overspends without a plan. Your budget can break this financially crippling habit.

#4 - Build Wealth

Most people who don’t use a budget lack significant assets. I’m not talking about your home (yes, I realize it’s considered an asset). I’m talking about cash in the bank and liquid investments. The fact is, each dollar that is somehow siphoned from your bank account is one less dollar to go towards your savings and wealth. It doesn’t mean you’ll be out on the street by the time you reach 75. But, you may still be working to pay off that hip replacement.

Take some time, turn off the TV and create a budget today. It won’t bite, I promise. It won’t even glare at you. But, it will help you manage your personal finances, reduce your stress about money and help you build your personal wealth.

Are you sold on it yet?

The Application

It sounds more intimidating than it is. Most online banks have similar applications. They’ll ask you to provide the same information that a traditional bank will. The difference is that you can fill it out and submit it from the comfort of your living room while rubbing your toes together. You’ll be asked for your name, mailing address, phone number, social security number and driver’s license information.

You will also be asked for an account number and routing number from your current savings or checking account (I’ll explain why in a moment). Then, you’ll choose a username and password for accessing your savings account. It shouldn’t take more than a few minutes to complete the application.

Transferring Money

Next, you need to put money into your new account. This is the reason you provided your current bank account number and routing number on the online application. Your online savings account will be linked to your traditional bank account so you can transfer money back and forth easily. To create your new account, you will need to make an initial deposit. You may want to sit down before reading further because the required deposit is huge.

It’s an entire $1. A good ole buckaroo!

Still with me? You’re done. You’ve opened your online savings account. You’re now free to transfer money in and out of your account at your leisure.

Getting Access To Your Savings

If you need to tap into your savings, you’ll have a few options. First, you can simply transfer money from your savings to your traditional checking account. Second, you can use any ATM that supports your online bank’s debit card (they’ll mail it to you right after opening your account). Third, you can use your debit card in the same manner as a credit card. It doesn’t matter if you need to buy groceries, movie tickets, or that widescreen TV you’ve been salivating over.

Opening an online savings account is easier (and quicker) than most people realize. And getting access to your money is simple and convenient. What’s more, the interest rate is nearly 8 times what your local bank offers. Now, do you understand why I’m such a big fan of these accounts?