TCFBO #031: Budgeting Principle #2

Read Time: 4 minutes

Last week we talked about Budgeting Principle #1 and why budgeting is more about mindset than simply a practical way to manage your money.

If you missed it, you can read about it here.

Today, we’re going to share the second of the five budgeting principles we follow along with the method we use to implement this principle in our personal and business budgets.

Budgeting Principle #2:

“Give every dollar a job.”

This second principle is about proactively managing your money.

In this instance, “dollar” is short hand for whatever currency you trade in whether it’s dollars, pounds, euros or something else entirely.

“Give every dollar a job” means that when you receive any money you make a proactive decision as to how that money is going to be used.

So instead of getting to the end of the month and wondering where the money went, you decide in advance what job you need each dollar to do.

If you’ve decided to follow Budgeting Principle #1, (and we’d recommend doing so), then the first thing you’ll do is allocate a percentage of everything you receive into a pot of money that is yours to keep.

Then you decide where the rest should go.

Do you need to give some dollars the job of paying bills this month?

What about giving some dollars the job of paying for a marketing campaign?

Or could you give some dollars the job of saving towards future outgoings?

Giving every dollar a job ensures deliberate use of your funds.

And it enables you to align your day to day spending with your longer term financial goals.

Because once you’ve given every dollar a job, if you want to buy something you haven’t budgeted for, you’re going to have to stop some dollars from doing the job you’ve already given them in order for them to go and buy this new unbudgeted item.

And that forces you to stop.

And think.

And prioritise.

Now, the method we use to implement this principle is “Envelope Budgeting”.

This method is beautifully simple.

Traditionally, it involves taking a bunch of envelopes and writing a specific expense category on each one.

So, if you’re applying it to your business finances you might have envelopes for:

Rent

Wages

Marketing

IT

Taxes

And so on.

Then, once you’ve labelled up your envelopes, you physically divide the cash you have to cover each category into the appropriate envelope.

Of course, nowadays you can replicate this method using budgeting apps and spreadsheets.

But whether you implement it digitally or physically, it’s a straightforward way to put the principle of “give every dollar a job” into action.

To get started, create your budget categories.

Then list out all your monthly expenses - both fixed and variable – for each category.

And once you've determined how much you need for each category, divide all the money you currently have between the categories.

If you’re going down the traditional route with physical envelopes, this is the point where you put the cash in the envelopes.

The thing with physical cash is that you can’t put more cash into a category than you actually physically have.

So if you are implementing this digitally, you can’t allocate more money than you currently have, whether that’s in cash or in your bank account.

For instance, you can’t divide up money you’re expecting to receive next week because you simply don’t have the money in your possession yet.

This keeps you honest to the money you have today, not what you think you will have in the future.

Once all the money is allocated, (i.e. you’ve given every dollar a job), you simply spend within those set limits.

You only use money from each designated envelope for its specific purpose.

When an envelope empties, that's your limit for the month in that category.

This helps you stick to your budget and prevents overspending.

Of course, there will be times when an envelope is running low but you need to spend more in that category.

In that case, you'll have to reassess and reallocate funds from another envelope, ensuring you stay within your overall budget.

We first implemented this method for our personal finances and, once we got used to it and started to experience the benefits, we applied it to our business finances as well.

Initially we used cash and physical envelopes.

If we had to overspend in a particular category, we would physically move money from one envelope to another.

And this physical interaction with cash changed the way we thought about money.

Because when you’re handling cash, it’s more than just numbers on a screen – it’s real, physical cash that you can see dwindling.

When you use a card to buy something, you’re performing the same action of swiping or tapping your card whether you’re spending $10 or $1,000.

Whereas, when you have to count out $1,000 in cash, it has a much greater impact on your spending behaviour.

Because you physically see and feel how much money you are parting with.

Plus, when you overspend in something non-essential and you have to take cash out of an envelope that’s allocated for essential expenditure, it really does make you focus on your spending habits and how you got into that situation.

And that forces you to prioritise your expenses to make sure your essential needs are always met first.

Now, we know in today’s world it’s not practical to operate solely in cash.

And after a period of time, we were confident that we had trained ourselves sufficiently to pay attention to the amounts we were spending, regardless of whether we used cash or card.

Yet even today, after more than 10 years of using the method, we still operate part of our personal finance budget in cash.

Because there are some major psychological benefits to running even a part of your budget as cash.

So do consider giving a cash budget a go, at least for a period of time, if you decide to implement Envelope Budgeting.

Combining Envelope Budgeting with the principle of “give every dollar a job” creates a powerful tool for financial management.

It allows you to take charge of your finances, leading to better saving and spending habits and, ultimately, a clearer path to your financial goals. 

Let us know how you get on and we’ll see you next week.

Paul & Philly

P.S. Is there something you’re struggling with or a topic you’d like us to cover? Drop us an email and we’ll address it in a future newsletter.

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