Budgeting Cash Envelope System Done Right

The Budgeting Cash Envelope System

How The Budgeting Cash Envelope System Works

The budgeting cash envelope budgeting system is a refinement of the All Cash Budgeting Method.  In other words, instead of paying for everything with cash, the basic philosophy of the budgeting cash envelope system is pay bills using a checking account, but to use cash to pay for everything else.  Here is an illustration of how it works.

What this illustration shows is that you used checks to pay all of your bills, and then you converted the remaining $1,000 of your paycheck in cash.  So what are you going to do with all of that cash?  How do you properly manage it?  That’s where the envelope system comes in.  What it means is splitting up your cash and putting it in separate envelopes, with each envelope representing the amount of money you can spend within a certain time period or on a certain category of expense.

Budgeting Cash Envelope System Split CashAnd how do you decide how to split up your cash?  Of course it should be according to your needs, preferences, goals and personality.  It’s also vitally important that you split up your cash in a way that works best for you, with “working best” being defined as the system you’re most likely to follow to live within your means (which in this example means not spending more than your $1,000 of cash until your next paycheck).  With that flexibility in mind, there are 4 main schools of thought on how to split up your cash when applying the budgeting cash envelope system.

Method #1 – Divide You Cash Into Time Periods “Weekly Method”

Assuming there were 4 weeks in a month, if you wanted to divide your cash into time periods then you would put $250 in 4 separate envelopes labeled “Week 1” through “Week 4”. This budgeting cash envelope system would then use the $250 for week 1 to make all of your day-to-day purchase: groceries, gas, entertainment, etc.  If you elect to use this “Weekly Method” then you need to understand that spending needs for different weeks could be quite different.  For example, one week might be heavy on groceries, and another might be heavy on gas or other expenses.  Either way, if you maintain your discipline then the idea is that the week-to-week highs and the lows should average out.

But what if you happen to have a week that requires heavy spending for one reason or another?  While not ideal, you would either drastically cut your spending or, if necessary, you would borrow cash from the next week’s envelope to make it through.  On the flip side, what if you had a week with exceptionally light spending?  Rather than go out and blow the money, I would suggest putting in an additional envelope marked “Extra.”  That way you’ll have an additional source of cash to draw from if another week’s spending runs high.  Finally, if you end the month with any cash remaining then you’re in the enviable position of having extra money that you can either save or spend.

Method #2 – Divide Your Cash Into Categories of Spending “Category Method”

Budgeting Cash Envelope SystemAnother budgeting cash envelope system is an alternative to the Weekly Method of organizing your cash envelopes, you could use the “Category Method.”  You do this by creating separate envelopes for groceries, gas, fun/entertainment, savings and any other categories that make sense to you.  As you go through the month you draw cash from the appropriate envelope depending on what you’re spending money on.  If run out of money in a particular envelope then ideally you shouldn’t spend any more money on that category.  However, if it’s urgent (you need gas so that you can get to work) then you can take some cash from another envelope where you might have some extra (such as groceries, but now you might have to forego the chips and ice cream you wanted).

The upside of the Category Method is that it’s easier to predict how much money you’ll spend on various categories of expenses than it is to figure out how much you’ll spend in a given week.  For example, it’s much easier to estimate how much cash you’ll need for gas in total than it is to determine how much cash you might need for week 3 as opposed to week 4.  On the other hand, the Category Method can be difficult to apply in practice.

“Using Cash Into Categories Of Spending Takes Time To Get Use To, But It Is A Great Budgeting Cash Envelope System!”

To illustrate, say you’re going to the movies, but you’ve got to get some gas on the way, and you’re going to pick up some milk on the way home.  How are you going to handle that in the context of the Category Method?  Are you going to take your “Gas,” “Groceries,” and “Fun” envelops with you, and then pay for each with separate money?  Or are you going to take what you estimate what you need from each envelope and carry a combined amount of cash.  Do you know what category the cash that might already in your purse or wallet belongs to?  In which envelope(s) will you put any change you might have left over, or will it just stay in your purse or wallet?

In summary, while the Category Method is conceptually sound, it can be difficult to develop and perfect a system that will keep your cash in various categories segregated.  If this budgeting cash envelope system doesn’t sound right for you we have the lump sum method.

Method #3 – The “Lump Sum” Method

Cash Envelope System Lump Sum MethodYou might not want all of cash to be henpecked into specific categories of spending or artificially short time-frames.  In other words, forget all this envelope stuff.  The philosophy behind the Lump Sum Method is that you just want to know flat out how much money you have $800, how long it needs to last 1 month, and then be left alone to manage it as needed.

The appeal of the Lump Sum Method is that it conveys a sense of freedom “Wow, I have $1,000 of cash to spend however I want.”.  On the other hand, the Lump Sum can convey a false sense of freedom that can get you into financial trouble.  For example, let’s say that even if you’re very, very careful with your cash, essentially $700 will be needed over the course of the month for the very basics, such as food and gas.

If you lose sight of that and go out and the beginning of the month and blow $400 on “fun” just because you started out the month with big wad of cash, you’ll end up running out of money before the end of the month…even if you do nothing else fun or that you want to do (because you’ll only have $600 left, or $1,000 less $400, when you really need $700 at a bare minimum to cover real necessities such as groceries and transportation)!

My Observations Of The Budgeting Cash Envelope System Called The “Lump Sum” Method

In summary, my observation is that the Lump Sum Method can work very well with people that are highly disciplined with their money.  By “highly disciplined” I mean “stand at attention for 3 hours in the rain without moving a muscle” type of disciplined.  This budgeting cash envelop system is by far the most discipline of all methods that have been covered. On the other hand, if you have a single impulsive bone in your body when it comes to purchases “Hey, I wasn’t really looking to buy anything, but that seems like a good deal!”, then I would proceed very carefully before adopting the Lump Sum Method.

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Method #4 – Combining The Budgeting Cash Envelope System Methods

In using the budgeting cash envelope system there’s no reason why you have to exclusively use any one of the above methods.  Instead, you can combine them any way you see fit according preferences, personality and goals.  For example, in thinking about how to split up your $1,000 you might decide to put $600 in an envelope marked “Groceries & Gas” and then divide the remaining $400 in 4 separate envelopes of $100 for weeks 1-4.  That way you have money set aside that’s dedicated to necessities, and you have an extra $100 each week to take care of everything else.  Again, that’s just an example; there’s no end to the combinations you can come up with in using the budgeting cash envelope system to meet your own customized needs and circumstances.

Cash Budgeting Method

Cash Budgeting Method Explained

How Does The All Cash Budgeting Method Work?

The all cash budgeting method is simple and straightforward.  Here’s essentially how it works.

  1. You get paid.
  2. You convert the entire amount of the check to cash.
  3. Pay all of your bills in cash.
  4. You set aside any cash that you want to save in a semi-safe place (the proverbial jar in the closet).
  5. With your remaining cash you cover your day-to-day living expenses.  If you run out of cash, you quit spending.

Who Is The All Cash Budgeting Method Best Suited For?

As appealing as the all cash budgeting method is in terms of its simplicity, it’s only a practical money management solution for a limited number of regular people.  Why? Cash Budgeting Method Best Suited For You For one thing, it’s a significant (not to mention stressful) issue to keep cash – especially large amounts of cash – safe and secure.  Also, while you might be able to walk down to the property manager’s office to pay your rent in cash, it’s much more of a pain to do so for things such as your utilities and phone bill.  Despite its drawbacks, the all cash budgeting method can be useful for the following categories of people.

  1. Young kids living at home.
  2. Students away from home whose primary expenses are largely covered for them (room, board, insurance, etc.).
  3. Those who are living with relatives or friends due to age or personal hardships.
  4. Those with a lack of understanding and/or a great fear of banks and the financial system in general.
  5. Those who have lost checking account privileges by doing things such as bouncing checks or continuously over-drafting.  It can also be from not settling up with the bank, either due to excess, abuse, mismanagement, or a lack of understanding.

The all cash budget method of budgeting is also used by the following categories of people, who I would not broadly characterize as “regular people!”

  • Illegal immigrants or others who do not want to provide the necessary identification to open a bank account.
  • Criminals who do not want their identity or whereabouts to be traced.
  • Anyone else who wants to remain anonymous for whatever reason.

Is the all cash budget right for you?   Check out our article on The Budgeting Cash Envelope System.

7 Effective Budgeting Strategies

7 Effective Budgeting Strategies

For effective budgeting strategies, it’s important to understand the difference between budgeting principles and budgeting methods.  When talking about budgeting principles I am referring to the underlying reasoning and rationale behind effective budgeting.  The principles aspect has to do with the “why” behind approaches to budgeting.  Effective principles of budgeting do not change over time, just as principles of mathematics do not change over time.  After all, no matter how much the technology around budgeting advances, $3 less $2 will always equal $1.

When talking about budgeting methods I am referred to the “how” in terms of the tools, systems, and resources one employs to apply budgeting principles.  But budgeting methods also has to do with various systems of budgeting one chooses to use to manage their money.  The budgeting methods are as follows: the all-cash budgeting method, the envelope system, as well as check, debit card, and credit card budgeting methods.  What this means is one person may track their budget using a pencil, paper, and their checkbook.  Another may do so using credit cards and the latest integrated cloud-based personal finance software.

You can also take advantage of our budget calculator, which will assist you in creating a monthly budget.  Yet despite the use of vastly different budgeting methods, each of these individuals could be equally proficient in applying principles of effective budgeting strategies.  And what are these budgeting principles I’m referring to?

7 Effective Budgeting Strategies

  1. A budget needs to tie to how much money you actually have in the bank.  It does no good if you’re budget says you have $100 to get through the month, but in reality your checking account is Effective Budgeting Strategies Monthly Budgetoverdrawn $200.
  2. A budget needs to be realistic.  Your estimated income and expenses need to be as close an approximation as possible to your actual income and planned spending.
  3. A budget should cover a specific period of time.  Monthly budgets are best in most cases, but other budget periods (such as annual budgets) can also work if they more logically track your income and expenses.
  4. You should be able to update your budget quickly and easily.  While this may sound like mere convenience, it’s important because if you find your budgeting method to be excessively cumbersome there is a danger you could stop doing it altogether.
  5. A budget is a vital communication tool, so it should be intuitive and easy to understand.  Specifically, you should be able to clearly tell where your money is coming from, and where it’s going.
  6. A budget’s format should be flexible.  This will allow you to easily modify it as your preferences and circumstances change over time.
  7. You have to be committed to and respect your budget.  If you’ve budgeted $40 for entertainment and you spend $400 then you’re wasting your time.

This is okay, because as long as you follow effective principles of budgeting there are many different budgeting methods to choose from. Having effective budgeting strategies will allow you to better manage your finance to meet you financial goals.  As long as you incorporate the principles outlined above, you can employ the budgeting method that best reflects your own personality, preferences, priorities, and circumstances.

Pay In Cash

Pay in Cash, Checks and Debit Cards Comparisons

Pay in cash, writing a check and using a debit card are three different ways to do the same thing: to transfer some of your money to someone else.  Let’s explore the advantages and disadvantages of each method of payment.

Pay In Cash

Stores (and people) are almost always happy if you pay them in cash.  Here are some disadvantages if you pay in cash.

  • Security – If you have a significant amount of cash on you there’s always a risk that it can be lost or stolen, and if that happens then it’s gone forever.  Businesses like when custom pay in cash, at a certain point even they can have security concerns as well.  For example, you generally can’t bring a suitcase full of $100 bills to a reputable car dealer to pay for a vehicle in cash.  Why?  Because that much cash is a pain for a business: they’ve got to count it, store it, guard it, transport it to the bank, etc.  In summary, while cash is good, too much cash is a problem.
  • Trans-portability – When you pay in cash you generally need to do so in person, because there are risks obvious involved in sending cash in the mail or in providing someone else with cash so that they can pay a financial obligation on your behalf.  In other words, while there’s no harm in putting a $5 bill in your nephew’s birthday card, it wouldn’t be wise to send your daughter to school with a sack full of cash so that she could pay her out-of-state college tuition.  No, in that case you would have to make the long, inconvenient trip to the tuition office.

“If You Pay In Cash While Traveling Be Extra Careful To Hold On Tightly To Your Cash!”

  • Record-keeping – When you pay in cash it can be very difficult to remember where it all went.  For example, let’s say that you recently got $100 in cash from an ATM, but now you have just $30.  Where did the other $70 go?  Hmmmm, let’s see.  You got some gas and you grabbed a bite to eat…but it seems like there was something else.  Was there?  Again, with cash it can be hard to remember.
  • Supply – If you underestimate how much cash you need then your purchasing options will be limited (unless you can easily obtain more cash).  On the other hand, if you overestimate how much you need then you’ll end up with too much, and that could create security and/or record-keeping issues discussed above (not to mention the temptation to just spend it).

Note that I’m not suggesting that you should never pay in cash.  In fact, I think it’s a good idea to have a certain amount of cash with you at all times, because sometimes there really is no substitute for it.  However, for the reasons listed above, I don’t believe that using cash is a safe, efficient or effective means for paying most of your financial obligations.

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Paying With A Debit Card Versus Writing A Check

You should be aware that if you pay in cash you know this isn’t the best way to pay for most things.  Now let’s explore the advantages and disadvantages of using a debit card versus a check.


A debit card is a more convenient means of paying for things than a check for several reasons.

  • A debit card is more compact than a checkbook, which makes it easier to carry around with you.
  • When you pay with a check you have to take the time to write out who it’s to, the date, the amount, etc.  When you pay with a debit card all you have to do is swipe it though the payment processor and enter your PIN and, voila, the transactions is done (although waiting on the payment processor can sometimes take awhile).
  • You can run out of checks, but if you have a debit card then you can make as many purchases as you want as long as you still have money in your account.

Despite the convenience of debit cards, there are simply times when using one won’t work.  For example, try paying the babysitter with a debit card and see what kind of look you get.  No, if you’re out of cash in a situation like that then only a check will do.  Also, while practically all major stores have payment processors, some small businesses still don’t.  In any case, despite these examples to the contrary, more often than not debit cards are a more convenient means of payment than checks.

Related Article On Budgeting Methods Using Debit Cards

Store Returns

A store return goes more smoothly if you made the purchase with a debit card rather than a check.  For example, let’s say that you bought something at a store and the next day you realize it’s defective.  Assuming that you choose to return it (as opposed to simply exchanging it for the same item), if you made the purchases with a debit card then you can immediately get a refund in 1 of 2 ways.

  1. The store will put a credit back on your debit card equal to the amount they charged you for the item or
  2. The store will give you a cash refund.

By contrast, if you paid for same item with a check then your experience would likely be much different.  That’s because many stores have a policy that they won’t issue refunds for check-related returns until 10-14 days after the purchase, primarily because they want to make sure that your.


Pay In Cash Record-KeepingAre you now sold on using a debit card?  Well, don’t toss away your checkbook just yet.  Knowing how much money you have to spend at any given time is a critical element of effective money management, and keeping complete and accurate records of your financial transactions is an important part of that.  For example, if you start out with $1,000 in your checking account then it’s pretty obvious that you have $1,000 to spend.  But how much money do you have left after a few days?  What about after a few weeks, or even a whole month?  The only way you can know for sure is to accurately update your checking account balance based on your records of deposits and withdrawals.

Now keeping your checkbook updated may sound pretty easy.  After all, it’s just a little addition and subtraction, right?  Yes, that’s true in theory, but in practice it can be very challenging to stay on top of how much money you have (or don’t have!), because financial transactions tend to generate piles of paper that you have to sort through: store receipts, ATM slips, billing statements, contracts, warranties, disclosures, bank statements, etc.  Thus, the more you can do to simplify your financial records, the easier it will be to maintain a handle on how much money you have at any given time.

Record-Keeping Benefits From Checks

Now, assuming that you have carbon checks, writing checks is one of the ways that you can improve your record-keeping.  What are carbon checks and how do they help? A carbon check consists of an actual check (meaning the check you give to someone for payment) that is affixed to a carbon copy of the check that you keep for your records.  Thus, whenever you write a check that has an associated carbon you end up with two records of a transaction.  The first is the store receipt, and the second is the carbon copy of the check. By contrast, if you pay for something with a debit card, the only record you have of the transaction is the store receipt.

Another thing that makes checks better than debit cards for record-keeping purposes is that they’re sequentially numbered.  This is useful because it makes it very easy to tell if you’ve missed accounting for a transaction.  For example, let’s say that you have carbons for checks 1000-1010 in front of you, but upon closer inspection you realize that the carbon for check 1006 is missing.  What does that tell you?  It means that you need to figure out what happened to that check, because until you account for it then you won’t know for sure how much money you actually have.  But what if you still can’t find the carbon for check 1006 after searching through your financial records?  How are you going to figure out who yo`u made it out to and how much it was for?  By accessing your bank account online you should be able to view a photographic image of any check that you’ve written.

Related Article On Cash Budgeting Method Explained

Summary Of Record-Keeping

In summary, if you’re able to keep perfect records of all of your financial transactions then, theoretically, it shouldn’t matter whether you pay for something by writing a check or using a debit card.  However, life is real, not theoretical, and it’s not uncommon to periodically (or even frequently!) lose track of some of your ATM or debit receipts over the course of a month.  As a result, paying for things with a check is a safer bet from a record-keeping point of view.

Security (Identity Theft)

Identity theft is when someone illegally uses the personal information of someone else to fraudulently obtain money, goods, or something else in the victim’s name.  For example, you would be a victim of identity theft if someone ordered a credit card in your name and then used it to make purchases.  While both checks and debit cards carry risks as far as identity theft is concerned, thousands of people use them every day without any problems.  If that’s true, to what extent should you use (or not use) checks and debit cards as a method of payment?

A full discussion of identity theft is beyond the scope of this article, but for now I will say that determining the degree of security you need for identity theft isn’t much different than determining how much security you need for your car.  For example, is it enough to lock your car doors when you go into the store, or do you need a full-blown security system?  The answer depends on many factors: how much your car is worth, its make and model (some cars are more prone to theft than others), the incidence of theft in your neighborhood, as well as (and probably most importantly) the degree of protection you feel that you need in order to have a reasonable degree of comfort/peace of mind.

So when it comes to identity theft, my recommendation is to educate yourself on how it can happen as well as the various strategies you can employ to minimize your risks.  That will enable you to make an informed decision on how to handle your finances in terms of security.

Summary of Pay in Cash, Checks and Debit Cards

While it can feel really good from a psychological point of view to “pay in cash” for everything using cash, checks or a debit card, there are significant advantages to making purchases with a credit card if you can pay off your balance in full and on time each month.

The important thing is to be aware of the strengths and weaknesses of the each payment method and to adopt the one that best suits your needs for a particular transaction.

Monthly Budget – How & Why To Create One

Creating a monthly budget really has to be one of the most useful things that you can do. Essentially, you need to really understand how much you earn, from where and when and where it all goes to! If you are careful and honest about your tracking of spending habits, it will be very revealing I’m sure!

Once you have created a monthly budget template, it will probably offer some useful insights into squeezing more from your monthly income. You’ll also be aware of all of your monthly expenses that you may have forgotten about.

Monthly Budget – Income

The first step to basic budget planning and debt management budgeting is to calculate your income. Personally, I would calculate this as a monthly figure, but you may prefer weekly, I shall leave that up to you.

How many sources of income do you have? Perhaps you have a regular salary, overtime payments or bonuses, maybe social security payments or a second job. What about your spouse? Does he or she work? How much does this partner bring in to the household finances?

Try to be as accurate as you can here. It is very important that the numbers are compiled carefully. Accurate numbers will enable accurate decisions later on. If you receive a variable amount (perhaps you earn commission or tips) can you try to calculate an average? Do you have old payslips or bank statements that you can work from?

Our goal here is simply to arrive at a number which you consider to be your usual monthly income. Total it all up. Obviously, use the net income figure since that is what you actually see in your pocket.

Monthly Budget – Outgoing Expenses

Monthly Budget TemplateHere comes the scary part! No matter how much you may earn, and how satisfied you may or may not be with that figure, we all wish that we were spending less.

The monthly spending calculation is going to take either a bit of guess work or a lot of hard work. This is because some of your outgoings are small and cash based. For example, your daily sandwiches at work, sweets for the kids, renting a video or DVD are all payments out that are potentially difficult to track. Try using our expense calculator to track your monthly budget expenses. The expense calculator will help you identify all your expenses you may have otherwise missed. In addition to an expense calculator, we also have an in-depth monthly budget template. This monthly budget template has a lot more features that allow you to track all of your expense quickly and efficiently.

However, the bulk of your spending will be on large, known and regular items. For example, your rent payments, household insurance and loan repayments would all fit into this category.

Ideally, you will work out your income and expenditure over the course of two or four weeks. This way, you will be able to see how you are spending money and understand the pattern. Accuracy in completing this debt management budgeting exercise will prove to be very valuable indeed. With this knowledge, you will be able to understand you finances completely.

Why Should You Use A Monthly Budget Template?

Expense Calculator For Monthly BudgetsYou may be reading this, thinking to yourself about the pathetic and basic things that I have started with. You might be right. However, I am constantly amazed at the number of people that have never actually tried to accurately calculate their monthly budget.

For example, I have been writing this over two days (an afternoon and the following morning) and on the evening of the first day I met a friend that wanted to discuss finance with me. She is in her mid twenties, a bi-lingual expatriate who works for a major international bank and someone I look up to as being really quite bright. She wanted to talk about making some monthly savings. Yet, as we chatted she realized that she had no idea about her spending patterns and whether or not she actually has any disposable income. Who would have guessed it? So even if this is too basic for you, give it a go to humor me.

Now that you have completed this little debt management budgeting exercise, you will hopefully be able to see areas where your spending can be controlled a little. You will also be able to see whether your income is actually covering your outgoings each month. If it doesn’t, you need to make some drastic changes to your lifestyle to get back on track!

If your debt management budgeting exercise has shown that you are overspending each month, it is vital to make changes. Without changes, you will never be able to become solvent unless you win a lottery. That should worry you.

Top 5 Frugal Living Tips – Living On A Budget

Why Frugal Living? Many couples are now deferring becoming parents and instead opt for getting a mortgage, traveling and preparing for retirement before junior arrives. The reason is the economic cost of passing up double wages and living on one income.

How do you do it?

Well, if you’re reading this for the first time scratching your head and pondering this very question understand that you’re not the first. And you most certainly won’t be the last couple to face this dilemma. It’s a big decision and you are probably already adding up all the creature comforts (the daily latte, magazine subscriptions, 2-door coupe) that are going to be side-lined when you start on your frugal living path.

But it doesn’t have to be all bad! Reducing the working hours of one partner can free up some more lifestyle choices as well. Holidays are easier to juggle (albeit harder to pay for), socializing time is freed up and odd jobs around the house can be accomplished without spending weekends rushing around.

If you planning on living on one income in the near future you might want to peruse the 5 frugal living tips.

5 Frugal Living Tips

Frugal Living Tips BudgetAddress The Budget – Procrastinate in creating a budget will only mean delayed, and harder, results of limited spending. You can’t keep the same spending habits when your family income goes from 100K to 50K. Some immediate savings are going to come from work-related expenses for the partner who has left the workforce such as parking, transport fees, fuel, cafe lunches etc. Other areas that might need to be pruned are non-essential items such as the weekly manicure, daily newspaper, cable-TV subscription. It may seem like you’re giving up a lot but in essence your just removing what you filled your double income up with.

Consolidate Any Loans or Credit Cards – this is an area where you can make huge immediate savings. If your mortgage length is 25 years try extending it over a 30 year time span. Of course you will end up paying more interest but it is better to have a mortgage that is achievable than default on one that’s not. Provided you don’t fix the interest rate you can supplement payments as and when you receive extra monies.

Frugal Living Can Be Painless

Buying in Bulk & Thinking Ahead – This seems like one of the most obvious frugal living tips, but the mind set of most individuals is well it’s only $1… that’s not going to make a difference. Let’s say you purchase two diet cokes every day at work from the vending machine for $1 each. We’ll assume you work 5 days a week for the whole year (260 days). You’re spending $520 a year on diet coke from the vending machine. Now assume you purchase the diet coke from the store when it’s on sale for $4 for a 12 pack. Now you’re average price per diet coke is $.25, so you’re spending $130 annual. You’d save yourself $390 a year. Being prepared and buying in bulk is one of the best frugal living tips, since it doesn’t impact your life style.

Find Supplemental Income Sources – there are so many opportunities today for stay-at-home mums or dads. Be creative and use your time well. Even an extra $50 per week can help out the family budget.

Increase Your Salary Insurance – the risk losing one salary while both partners are working isn’t too detrimental. This should only be considered if you’re only living on one income. Salary Insurance protects the main income in case of death, disablement or if the breadwinner has contracted a terminal illness. Work related accident insurance is covered by your employment (unless self-employed) but Salary Insurance protects against things you can’t.

Make some wise choices and frugal living on one income shouldn’t be too hard. Ignore the fact that your lifestyle will need to change and you will find that problems will continue to mount regardless of your nonchalance.

Retirement Income – Your 7 Sources

Retirement Income

Retirement income – What are the main 7 sources for retirement income? I’ll explain the differences between the different sources of retirement income so you can better plan for your future.

1. Welfare or Charity

While most people would never like to picture themselves having to be put on welfare. There is a reality of poor planning that could result in the dependency of money from charity. Frequently, I see churches and family members asking to raise funds immediately after an unexpected death of a loved one. One of the easiest things to do to prevent the need to rely on others is to have enough life insurance for both you and your spouse.

Retirement Income – Your 7 Sources Continued Employment

2. Continued Employment

So you’re now 62 or 65 or even 67… what’s next? You may realize that you do not have enough income to cover your bills which could include the mortgage, the car payment, and other necessary bills. So one option would be to continue to work. I guess if you enjoyed your full time job, then this would not be an issue. Unfortunately, a majority of the population at the age of 65 are tired of working for their past 40 yrs. Don’t forget that health issues could really be the number one determining factor on whether you can continue to work.

3. Non Qualified Assets or Mutual Funds

Non qualified assets are things that have already been taxed. This could include your savings account, monies in your CD’s, your stocks and mutual funds purchases made from after taxed dollars. How long you can live off of your non qualified assets depends on the size of your account and your monthly living expenses.

4. Roth IRA

Roth IRA‘s can be great source of income in addition to your other qualified accounts. The best thing about Roth IRA’s is the fact that you can take future income distributions without having to pay any taxes. Depending on how well the account is managed and grows, this could provide much more retirement income especially when you do not have to pay taxes.

5. Traditional IRA

Traditional IRA are just another form of qualified accounts. Chances are if you had an old 401k and did a rollover, it would have been rolled into a traditional IRA. I would say a majority of retirement accounts are qualified accounts in the form of a 401k or traditional IRA.

Retirement Income – Your 7 Sources 401k

6. Qualified Plans

Anything that allows you to contribute on a pretax basis could be considered a qualified plan when it comes to retirement. A 401k is the most common through payroll deduction. Others could include a 403B or tax sheltered annuities. Pensions and annuities are great forms of retirement income because of the predictive nature of the investment. It only makes sense to have a stable and predictable form of income each month once your do plan to retire.

7. Social Security

For current seniors, this is the most anticipated form of retirement income. In 1960, for every retired senior taking social security benefits, there were more than 50 workers paying in. They predict that 20 years from today, there will only be 3 workers paying into social security for every retiree.

Retirement Income Conclusion

More sources of retirement income is always better than just one. Can we solely depend on social security for your retirement? I don’t think so. It’s impossible to expect your social security benefits to pay you more than what you were earning during your working years. With a sensible investment strategy and having your mortgage paid off can really help increase your income at retirement.

Get More Information On 401k Contribution Limits 2017

Is A 401k Rollover Worth It? Pros & Cons

So you’ve recently left your job and wondering what to do with the money you’ve been saving while you were working for your company. Well, now that you have left, the rules for your retirement plan have changed substantially. Here are the pros and the cons of keeping money in your 401k plan as opposed to doing a 401k rollover into an IRA:

The Pros About a 401k Rollover

– Usually as long as you have over $5,000 in your plan you will not be forced out and can keep you assets in your former employers plan.

– You can make fund transfers at any time for little to no cost between the investment options.

The Cons About a 401k Rollover

– You cannot make a 401k contribution to this plan anymore and cannot take any loans from the plan.

– You are stuck with the investments the plan offers.

– The plan can change it’s rules, investment options, and even the investment company they work with, which means it’s ever changing and you are the mercy of your former company’s decisions.

– You can take partial withdrawals, however the IRS mandates at least 20% federal tax withholding on any 401k withdrawals.

– Some plans start charging fees once you leave the plan.

– The 401k plan is fully self directed meaning that you get no advice on where to move your money and nobody is legally able to give you specific 401k investment advice.

– The 401k is not FDIC insured. If you do not know enough about how this effects your retirement assets do some research on FDIC vs. SIPC coverage and how it effects investments. I will also make a post later regarding this.

You may still have further questions about a 401k rollover before you make a decision. Our article “401k After Changing or Losing Jobs – What Now?” , goes into detail about the fees and penalties associated with 401k withdrawals.

401k Withdrawals

401k Withdrawals After Changing Jobs – What Now?

Throughout life we all experience changes. I heard a quote once from a wise man who said “When things are really bad things will change and when things are really good things will change as well.” Change is our lives and we must accept that. Now, what does this have to do with your 401k?

Well, when you hear those words “You’re fired!”, maybe you just get laid off as a large business reduction, or just changing jobs, one of the first things you are going to think about is how are you going to live? Here is where your 401k comes into consideration. Your 401k plan is most likely the largest asset other than your house you currently have and is a lot more liquid than your house, meaning you can get money out of it much easier. *Updates have been made to 401k contribution limits 2017*

However, 401k plans have a lot of rules and taxes come into play once you make the decision that you need to tap into your retirement savings. Before you start making 401k withdrawals ask yourself these questions:

4 Questions to Consider Before 401k Withdrawals

1.) What places can I get money now to supplement my income?
– Well if you were laid off or fired there is a good chance you can get unemployment income to offset what your job couldn’t produce and this will help keep your hands off of your 401k. Also, think about home equity lines of credit or credit cards as well. These are always only short term fixes and should be able to hold you over for a few months. You should always have emergency assets like these planned in case you do lose your job.

2.) Can I cut back on any expenses?
– Would you really keep living the same lifestyle if you were just fired? I highly doubt it. However, you would be surprised how much people don’t really cut back because they see the large 401k balance looming in front of them. Make sure you cut EVERY corner before tapping into your 401k.

3.) What is my income level (tax bracket) going to be for this year?
– Why is this important? Well, if you cannot cut back on expenses and you are maxed out on lines of credit, a 401k distribution may be the one thing preventing you from bankruptcy (in some cases bankruptcy isn’t all that bad, we’ll get to that later). Basically, if you make less money you pay less to Uncle Sam. If you get fired in October, well your income bracket will still be high and it would probably be advisable to wait until January 1 to make your 401k withdrawals. However, if you get fired earlier in the year, you may not get hit too hard by taxes. If you were going to make your 401k withdrawals, that would be the time to do it.

Penalties Explained From 401k Withdrawals

If you take a 401k distribution you will be taxed at your income bracket and there will probably be a 10% early withdrawal penalty. You must keep in consideration that any money you take will be income. For example:

If you made $34,000 for 2011, that puts you into a 15% tax bracket considering you file single. Now with the standard deduction that puts your income at around $29,000 or so. Now, the 25% bracket is for people making $34500 and above. So lets say you make a $10,000 withdrawal from your 401k plan:

First of all, your plan will withhold 20% of the withdrawal for taxes (this is an IRS requirement and cannot be avoided unless you do a Rollover 401k to IRA), which brings your check amount to $8,000 considering there is no mandatory state tax. Now, here is what you actually pay:

There would be $5,500 taxed at 15% – $ 825
Now, since extra $4,500 put you above the 15% bracket, that is taxed at 25% – $ 1125
And there will be that 10% penalty on the full withdrawal amount of $10,000 – $ 1000

So, in this scenario, to get $10,000 you are having to give the IRS $2,950 of your hard earned money. This isn’t even looking at state taxes, this is only federal. That is 29.5% of your hard earned money that is gone, never to be seen again.

401k Rollover to IRA

4.) What are my 401k plan rules?

– Does your 401k plan actually allow you to take partial withdrawals or do you have to take out the full balance? All plans have different rules and a lot of plans don’t even allow partial withdrawals. They surely won’t offer a loan because you aren’t working for the company anymore. So, what is your next best alternative? Initiate a 401k rollover to an IRA and use the rollover IRA to take partial withdrawals from.

Most investment firms offer free IRAs or you can go to your local bank and put your money in a money market IRA. Also, rollover IRA accounts do not restrict you on the amount of partial withdrawals you can make and there is no mandatory 20% federal tax withholding on 401k withdrawals, so it may be a better option depending on your circumstances. Also, you can usually do a 401k rollover and then rollover the money from the IRA account into your new companies 401k when you find that job.

Use our 401k Calculator to see negative effects of taking money from your 401k plan have on your long term future.

Rollover 401k to IRA?

What do I need to figure out before I decide on initiating a rollover 401k to IRA?

There are many factors involved before deciding on rolling over your 401k into an IRA.

4 Things To Know Before You Rollover 401k to IRA

1. What are the fees involved in keeping the 401k plan or rolling it over to an IRA? You need to make sure you are not going to be paying an exorbitant amount of fees with your new retirement accounts.

2. What matters more to me? The ability to have many more investment options and the ability to use a financial advisor to guide me on how to invest and how much to save, or would I rather be more limited to my investments in the 401k plan and pay less fees but have to manage everything myself?

3. Do I need to consolidate my assets together and be able to have a retirement account to make IRA contributions to? Remember, many times a 401k rollover to an IRA is not a reversible thing and if you do not know all of the facts you could be hurting yourself.

“4.Would it be better to roll my old 401k plan into my new employers 401k account?”

This is beneficial if you think you may want to use the 401k money you have to buy a house or maybe just use it to pay down some of your debt. Many 401k plans offer 401k loans and right now the interest rate is very low, and keep in mind the interest if only paid to yourself. If you cannot pay back the loan you will pay taxes on the money and probably a penalty, however if you do pay it back you have only paid interest to yourself and will not have any tax consequences. On the other hand, if you initiate a 401k rollover into an IRA, you cannot take a loan from an IRA account and will have to make a withdrawal.

The ability to take loans is a great beneficial factor in consolidating your 401k assets into your current plan, however if you do not need the money, more than likely the IRA, with the ability to provide more investment options, will be your best long term retirement strategy. Related Tools: 401k calculator