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3 Steps to Create a Cash Envelope Budget System

December 4, 2016

What if you were told you could save money by using cash instead of credit and debit cards? Until the relatively recent advent of plastic cards, most individuals used cash for their purchases. While modern consumers love the convenience, perks, and limited liability of cards, studies have shown that credit card users spend more money, especially since parting with cash is psychologically more “painful” than swiping a card. If you are having a hard time sticking to your budget when your finances are not in front of you, then sorting your budget allotments into tangible categories through the cash envelope budget system may be right for you.

 

In a digital environment where everything has an app, you may have already heard of this system but previously deemed it too “old-school” or difficult to maintain. However, we’d argue that this mindset, in which electronic tools streamline every facet of our decision-making process, is precisely what contributes to senseless overspending. If you routinely rack up more revolving debt than you can comfortably pay off each month, you might want to take a second look at the money-saving opportunities associated with the cash envelope budget system, which, when implemented correctly, could help you save money and take control of your finances. Here are the three steps associated with creating a cash envelope budget system:

 

  • Audit Your Budgeting System

Whether or not your current budget is working for you, you need to take a look at it and figure out if it is conducive with the cash envelope system. The system operates on the zero-based budgeting concept — the idea that every penny you make should fall into a specific category — so if you already have this kind of budget system in place, you can move on to the next step. If not, you can find information about how to easily create a zero-based budget.

 

Learn More About Zero Based Budgeting

 

  • Make Envelopes for Each Category

Once you have your zero-based budget in place and you have divided your income into categories, it is time to make the envelopes. Grab a pack of envelopes and use one for each of your budgeting categories, such as groceries, gas, clothing, and entertainment. Write the category names on the back of the envelopes, withdraw the weekly or monthly (or whatever time frame you choose) cash allowance you have already calculated for each category, or simply ration out any remaining cash that falls within your budget.

 

One problem many people run into when trying to implement the cash envelope system is online bill payments. Different methods work for different people, and you can feel free to deviate from the structure of the system on this step. Some people decide to leave money in their checking account for their fixed expenses like rent, utilities, and student loan payments. Others find it helpful to create a separate checking account for these expenses. Of course, you are not going to end up with zero dollars in the bank when using this system — ideally, you will also be putting a designated percentage of your income into your savings account(s), retirement accounts, IRA accounts, investments, and any other long-term or emergency-only accounts.

 

  • Be Disciplined

Budgets can be hard to stick to at times, and they will always require hard work to maintain. The cash envelope system is no different, as it demands even more discipline to be successful. You need to be strict and committed for it to work. That means that if one of your envelopes is empty, it is empty, and your budget — as well as your spending for that timeframe and that category — is gone, without exception. Once you wrap your mind around this concept, you will find yourself cutting unnecessary costs. For example, if you have allocated $100 to spend on groceries for the week and end up with a $102 total at the register, you need to put back that magazine or that bag of chips. After some time, you will become more selective with the items you purchase, and you may end up finding coupons to make your budget stretch even more.

 

Reap the Rewards

Do not get discouraged if the system is not working correctly the first few months — perfecting a routine may take some time, and that is okay. However, if it works for you and your household, you could soon see the rewards of all your hard work. The cash envelope budget system is a great way to hold you accountable and let you see exactly how much money you have left to spend in certain categories, thereby keeping you from spending money on “extras” you might not really need. Give the system some time, and before long, you will likely see more money in the bank, have more wiggle room in your budget, and lessen your financial stresses.

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2019-11-15
The Importance of a Good Debt to Income (DTI) Ratio

It is evident to most people that having more income and less debt is good for their finances. If you have too much debt compared to income, any shock to your income level could mean you end up with unsustainable levels of debt. Every month you have money coming in (your salary plus additional income) and money going out (your expenses). Your expenses include your recurring bills for electricity, your cell phone, the internet, etc. There are also regular amounts that you spend on necessities, such as groceries or transportation. On top of all of this, there’s the money you spend to service any debts that you may have. These debts could include your mortgage, rent, car loan, and any student loans, personal loans, or credit card debt.  

What is the Debt-to-Income Ratio (DTI)?

The Debt-to-Income Ratio (DTI) lets you see how your total monthly debt relates to your gross monthly income. Your gross monthly income is your total income from all sources before taxes and other deductions are taken out. Below is the formula for calculating your DTI:

DTI = (Total of your monthly debt payments/your gross monthly income) x 100

  Example: Let’s suppose the following. Your gross monthly income is $5,000, and you pay $1,500 a month to cover your mortgage, plus $350 a month for your student loans, and you have no other debt. Your total monthly payments to cover your debts amounts to $1,850.  

Your DTI is (1,850/5,000) x 100 = 37%

Here’s a
handy calculator to work out your DTI.  

Why is Your DTI Important?

Your DTI is an important number to keep an eye on because it tells you whether your financial situation is good or if it is precarious. If your DTI is high, 60% for example, any blow to your income will leave you struggling to pay down your debt. If you are hit with some unexpected expenses (e.g., medical bills or your car needs expensive repairs), it will be harder for you to keep on top of your debt payments than if your DTI was only 25%.  

DTI and Your Credit Risk

DTI is typically used within the lending industry. If you apply for a loan, a lender will look at your DTI as an important measure of risk. If you have a high DTI, you will be regarded as more likely to default on a loan. If you apply for a mortgage, your DTI will be calculated as part of the underwriting process. Usually, 43% is the highest DTI you can have and likely receive a Qualified Mortgage. (A Qualified Mortgage is a preferred type of mortgage because it comes with more protections for the borrower, e.g., limits on fees.)  

So, What is a Good DTI?

If 43% is the top level DTI necessary to obtain a Qualified Mortgage, what is a “good” DTI? According to NerdWallet, a DTI of 20% or below is low. A DTI of 40% or more is an indication of financial stress. So, a good rule of thumb is that a good DTI should be between these two figures, and the lower, the better.   

The DTI Bottom Line

Your DTI is an essential measure of your financial security. The higher the number, the less likely it is that you’ll be unable to pay down your debt. If there are months when it seems that all your money is going toward debt payments, then your DTI is probably too high. With a low DTI, you will be able to weather any financial storms and maybe even take some risks. For example, if you want to take a job in a field you’ve always dreamed about but are hesitating because it pays less, it will be easier to adjust to a lower income. Plus, debt equals stress. The higher your DTI, the more you can begin to feel that you’re working just to pay off your creditors, and no one wants that.  

DTI and Student Loan Refinancing

Your DTI is one of several factors that lenders look at if you apply to refinance your student loans. They may also assess your credit history, employment record, and savings. Refinancing your student loans may actually decrease your DTI by lowering your monthly student loan payment. This may help you, for example, if you want to apply for a mortgage. ELFI can help you figure out what your DTI is and if you are a good candidate for student loan refinancing. Give us a call today at 1.844.601.ELFI.  

Learn More About Student Loan Refinancing

  Terms and conditions apply. Subject to credit approval.   NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
Closeup of graduated college student counting money
2019-11-05
10 Ways to Save Money After Graduation

If you’re just graduating from college, the job market is an unfriendly one. It seems like every job post wants 5 years of experience, a Master’s degree, and pays just $28,000/year. As if you don’t have enough to worry about, you can’t seem to get away from the advice about saving for retirement and the value of buying a house over renting. How are you supposed to do either on a $28,000 salary and a bucket of student loans that coast at least that much? You have to get creative with your savings. To kickstart your thinking, here is ELFI’s list of 10 creative ways to save money after graduation.   When it comes to saving money after graduation, there are two methods: save more of what you make and decrease spending. Find what works for you based on your bills and habits. Also, don’t feel like you have to follow all 10 tips. Implementing even one of these tricks for saving money after graduation can help you be more financially savvy.   

1. Use Direct Deposit to Save 10%

Direct deposit isn’t just for eliminating a paper paycheck. It can also be your best friend for saving money after graduation if you request to have your employer automatically send 10% of every paycheck to a separate savings account. On that $28,000 salary, you could save $2,800 a year, which is only about $110 per paycheck. If you set this up as soon as you start that first job, you will never miss the extra money. If you already have a job, it’s never too late to set up a “rainy day” fund.   

2. Install “Round-Up” Apps

The same way your grocery store clerk asks you to round up to the nearest dollar for charity, you can use round-up platforms like
Acorns to set aside leftover change from purchases you make. With the Acorns debit card, the spare change from each purchase is placed in an investment account of your choosing. And when you shop via the Acorns app or Chrome Extension at 350+ retail partners, a percentage of your total purchase is contributed toward your investment accounts.  

3. Negotiate Bills & Eliminate Unused Subscriptions

You likely have a dozen or more automatic monthly payments coming out of your checking account or linked to a credit card. Some banks or apps like Truebill and Trim can help you find and cancel subscriptions that are unused or that you forgot you signed up for in the first place. These apps can also help you negotiate some services like your cable and internet or even your cell phone bill to help you get lower monthly rates.  

4. Make New Rules for Eating Out

From coffee runs and grab-and-go lunches to happy hours and GrubHub deliveries, millennials eat out an average of five times a week. If you can eliminate just one of these outings, you can save a minimum of $5/week (that’s $260/year). Try setting unwritten rules for yourself—or if you’re a “write down your goals” person, use a dry erase marker and your bathroom mirror. Try rules like only eating out only on Fridays and Saturdays. Or only eating out only with friends. You can even make weekly cash-only envelopes, and when you’ve run out of dollars, you have to eat in for the rest of the week.  

5. Make New Rules for Eating In

Sometimes, splurging on fancy groceries makes eating at home feel more fun. But you have to be careful at the grocery store or your bill can end up just as expensive as all those meals out. Consider rules for eating in, like Meatless Mondays. By eliminating costly animal-based proteins just one day a week, you can help save the planet and save money after graduation.  

6. Keep Impulse Buys Out of Your Cart

Do you always find yourself tossing extra items into your cart at the store? There are several tricks to avoid impulse buys to save money. The first, and easiest, is to never shop hungry. This keeps those extra tasty, and rarely healthy, items out of your shopping cart. Also, consider only shopping online. This helps you keep to your list. You can clearly review your cart before checkout, and you don’t have to feel guilty for making employees restock your regret items.  

7. Wait 24 – 48 hours Before Hitting the Checkout Button

Shopping online has many perks. The excitement of variety and good deals can hook even the savviest of shoppers, but practicing restraint and making yourself wait 24 to 48 hours before finalizing online orders can do wonders for your money-saving efforts. After a day or two, you can really think about if you “want it” or if you “need it.”  

8. Don’t Buy Anything New

Our eighth way to save money after graduating from college is to go retro and buy everything used. Buying second-hand isn’t what it used to be. In the past, shoppers had to roll the dice at garage sales or Goodwill stores, but in the days of Craigslist, Next Door, and Facebook Marketplace, you can be picky about your second-hand items. If you have patience, you can find everything practical like dishes and clothes, as well as everything unpractical like skis and AirPods.   

9. Freeze Your Credit Cards, Literally

Another “old school” method of saving is to freeze your credit cards...in a block of ice. You might not literally need to freeze your cards, but putting them in an inaccessible place or by simply not having credit cards, you keep yourself from racking up debt that comes with costly interest rates. Keeping yourself on a cash-only system will limit you to using money that’s truly yours. In case of emergencies, there’s always hot water.  

10. Refinance Your Student Loans

We can’t end this list about saving money after college without advocating for recent grads to consolidate or refinance their student loans. Student loan refinancing is the process of consolidating your loans (you can consolidate federal loans, private loans, or both) and obtaining a new loan at a new interest rate. People typically refinance with the goal of obtaining a lower interest rate or lowering their monthly payments to make paying their loan more manageable. Keep in mind that when you consolidate federal loans, you’ll lose access to certain benefits and protections such as income-driven payment plans.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
Woman holding a smartphone
2019-10-15
Best Apps for Budgeting in College

Managing money is hard, but budgeting in college? That’s a whole different ballgame. For a lot of students, you have so much to worry about with classes, work, and other involvements that finances often slip your mind. So how do you hold yourself to a budget when you can barely remember to feed yourself dinner? Luckily, we live in an age full of apps to help you get a jumpstart on budgeting and money management. Here are a few of our favorites.   Mint®. Mint is a free mobile app where you can view all of your banking accounts in the same place. It automatically updates and puts your transactions into categories so you can see where all your money is going - and where it’s coming from. It also recommends changes to your budget that could help you save money. Its features include a bill payment tracker, a budget tracker, alerts, budget categorization, investments, and security features.   PocketGuard®. Like Mint, PocketGuard allows you to link your credit cards, checking, and savings accounts, investments and loans to view them all in one place. It automatically updates and categorizes your transactions so you can see real-time changes. PocketGuard also has an “In My Pocket” feature that shows you how much spending money you have remaining after you’ve paid bills and set some funds aside. You can set your financial goals, and this clever app will even create a budget for you.   Wally®. This personal finance app is available for the iPhone, with a Wally+ version available for Android users. Like other apps on this list, it allows you to manage all of your accounts in one place and learn from your spending habits. You can plan and budget your finances by looking at your patterns, upcoming payments and expenses, and make lists for your expected spending.   MoneyStrands®. Once again, with this app, you’ll have access to all the accounts you connect. Its features allow you to analyze your expenses and cash flow, become a part of a community, track and plan for spending, create budgets and savings goals, and know what you can spend without going over budget.   Albert®. A unique feature that Albert emphasizes is its alert system. When you’re at risk for overspending, the app will send you an alert. The app also sends you real-time alerts when bills are due. Enjoy a smart savings feature, guided investing, and the overall ability to visualize your money’s flow and create a personalized budget.   Before you download any budgeting app, make sure you check out the reviews and ensure it’s legitimate. Because a lot of apps ask for your personal financial information, it’s essential you verify their legitimacy before entering your account number. Listen to what other people have to say and then choose the option that works best for you, because not every app will be perfect for everyone. Budgeting in college may be hard, but downloading an app is just one way you can make it easier. Maybe you don’t want to use an app at all. If you’re in that boat, you can check out some other approaches to budgeting here or here.   Note: Links to other websites are provided as a convenience only. A link does not imply SouthEast Bank’s sponsorship or approval of any other site. SouthEast Bank does not control the content of these sites.