When deciding how much of your money to put in each envelope of your budget, some are obvious. You have a specific budget for your groceries (hopefully). You know how many times you have to fill up your car in a given week. These have repetitive, tangible numbers that make it easy to plan for. Then you get to an envelope like Home Repairs or Vehicle Tags and you’re left wondering how much is an appropriate amount to ensure it is there when you need it. To help out, I have a simple method for determining a percentage to assign to the envelope which can be applied to any amount of money. This is an easy system to budget your envelopes each month.
This is a very math heavy and photo light post.
If you can bear with me, it is worth it.
You need 2 numbers before you can do this calculation:
Your estimated Net Income
Know or Estimated Category Costs
**If you already know these numbers, you can go ahead and skip to step 3
Step 1: Figuring Your Net Income
To figure your net income, take your hourly wage and multiply it by 40 (assuming you work a 40 hour week). For example, let’s assume your hourly wage is $15. Multiply that by 40.
15 X 40 = 600
Now multiply your weekly wage times 52 (the number of weeks in a year).
600 X 52 = 31,200
Next, take your yearly gross income (31,200) times .35 (to account for taxes and any pre-tax deductions taken from your check)
31,200 X .35 = 10,920
Lastly, take your gross income minus your estimated taxes and deductions.
31,200 – 10,920 = 20,280
$20,280 is your estimated Net Income.
Step 2: Determine Your Category Costs
To figure your category costs, you need to know how much needs to go to each category. Some of these can be estimated simply by your wants. If you want to makeover your living room in 3 years, set a budget for yourself and divide it by 3. For instance, say you want to spend $2000 on your living room makeover. The formula would look like this:
2000 / 3 = 667 per year
$667 is the amount you would need to save every year to have the money to re-do your living room. This same idea should be applied to all of your envelopes. If you know that your Vehicle Tag Renewal is $187 each year then that is the amount that you want to make sure is in your envelope at your renewal date.
Step 3: Getting Your Envelope Amount
I have never been (and probably never will be) a mathematical genius. Frankly, I am still waiting for the day that geometric proofs will become a staple in my life. I have always loved ratios, however. They are super easy and have many practical life applications, including helping you with your envelope budget.
Here is a basic ratio:
x/y = z/100
For our purposes, the ratio will look like this:
Known Envelope Amt/Net Income = x/100
X stands for the percentage of your total Net Income that is needed for your envelope category. Going back to our Tag Renewal amount of $187 yearly, we can plug our numbers into the formula.
187/20,280 = x/100
Now, you simply cross multiply (and feel free to use a calculator… no need to be a hero, unless you’re into that sort of thing).
187 X 100 = 20,280X
18,700/20,280 = X
X = 0.92 (and a bunch of other numbers that you
can just drop off)
Move your decimal two places to the left and you have your percentage:
Your Tag Renewal Envelope percentage is .0092%. However, because you are almost always going to have that crazy long decimal (in this case .9220907298) you should always round your second decimal place up to ensure you have enough money in the envelope. Note the difference below:
20,280 X .0092 = $186.57
20,280 X .0093 = $188.60
Step 4: How to Use Your New Percentages
Okay, now that you have your percentage figured out, it’s time to put it to work. You’ll be happy to know that this is the last step. Yay! You’ve just been paid and after you pay all of your bills you have your “extra” for envelopes (“extra” is actually already allocated, the word just delineates it for our purposes).
According to our calculations, your bi-weekly paycheck should be around $780. Assume that after paying your bills, you have $137 left. Here is the formula to figure out how much of that money goes to your Tag Renewal Envelope:
137 X .0093 = Amount to go in envelope
$1.27 is the amount
This may seem like a lot to take in, but the time it will free up for you in the future and the peace of mind you get from it is very worth it. You will also become faster with practice. I recommend reviewing your figures annually to account for pay increases and other changes to your budget. Looking for an easy and inexpensive envelope system? Check out mine here!