Since my post about using a cash system, I have had several comments and questions from those wanting to know more about how we determine our budget and establish our cash system. I'll try to answer the questions and comments that I think will be most helpful for you! This is a big topic, so I think that I will take 2-3 weeks to answer the questions as thoroughly as I can.

I'd be interested in how you figure out what to allocate to each
envelope. I tend to "collect" financial (and other self-help)
information without implementing it. My biggest hurdle is figuring out
what is reasonable for each rather than just identifying what we are
spending on each. 
                                        MomOnTheGo

I suppose there are many ways that you could decide on how much to allocate to each area of the budget, but for us, we use a three step approach.

The first step for us is to look at the big picture of our entire budget. We begin this by writing down our take-home income, and then our tithe and giving. Next we list all of our mandatory bills- mortgage/rent, phone/internet, electricity, gas, car insurance, health/life insurance, gas, etc.). This forms the framework of our budget.

From here, we look at how much is left and then start to allot the rest of our money to categories such as grocery (for us this includes toiletries and household, like cleaning supplies), clothing, recreation/entertainment, books and music, miscellaneous, etc. We begin to play with the numbers and see how it will all work together. If we have only $700 left after all the basics are paid, then these budgets are formed out of that remaining $700- there is no other option. If the numbers don't work, then the budgets get smaller, and we add it up again.

Also, everyone may do this a little bit differently, but for us, we prefer to set a savings amount before we start to divvy up the rest of our money into categories. Most financial teachers will tell you that you need to set aside your savings first, and we wholeheartedly agree. When we make occasional adjustments to our budget categories, we rarely alter our savings, because we consider that to be a non-negotiable. No matter how much you are living on, it is wise to find even a small amount that you can set aside before you spend anything else, so that you are not continually running a $0.00 balance at the end of each pay period, and it helps to deal with emergencies and to get out of the cycle of living from paycheck to paycheck.

The next step is to determine how much we are already spending in a given category.
Although this shouldn't be the determining factor in establishing a
budget, it can give you a good starting place for determining the
amount that may be appropriate. Most likely, if you have not been
budgeting up to this point, you will want to try to set your budget for
less than you have been spending. It is easy to spend more than you
need when you are not deliberately working within a budget.

The third step for us would be to analyze that amount and
decide whether we feel that is actually the amount that we wish to
spend, or whether we think that we could actually lower it a bit if we
were to be disciplined about it.

For instance, given total freedom with my grocery/household/toiletries
budget, I think that I could easily spend around $125 per week, likely
more than that. But, we don't think that $500 would be a reasonable
monthly allowance for our groceries. Instead we have currently set it
at $360 a month, or $90 a week (keep in mind that it is my priority to
buy high quality and organic foods and natural toiletries and cleaning supplies, and that I
am Canadian- the food prices here are significantly higher than in the
US, so your grocery budget may look very different from mine), and our
goal is to find ways to continue to get better quality food within that
budget, and to also find ways to lower it at the same time.

On a side note, I should add that I do not use very many coupons. This is not due to ignorance or lack of trying, but rather to the realities of where I live (coupons are not done much in Canada) and the types of items that I purchase. Coupons simply do not generally work out well for me, and it can often be more of a waste of my time in trying to find them and use them than it is worth. That said, I still use them when I can, I think they are fantastic for some people, and I am amazed when I see the reports of those who are able to use them! For those like me, I will soon be writing a post (or a series of posts) on how I purchase high quality items on a well-managed budget (which is significantly lower than many Canadian families we know- even those on a budget)- so stay tuned! But back to the topic at hand...

Now that our budget is in place, when payday comes, my husband simply
pulls up the file on the computer (we use an excel spreadsheet to
manage our budget- this is a wonderful, simple tool) and determines the
amount of cash that he needs to withdraw for that pay period, and then
puts the correct amounts of cash into our respective envelope systems.

Next time I will answer more cash system and budgeting questions, such as using a cash system with a fluctuating or commission based income, the cash system for the holidays, and practicalities of the system (what to use, where to get it, carrying around cash, etc.). If you have any other questions or comments about how we do our budgeting and use our cash system, please email me or leave a comment! I would love to answer your question!

Make sure that you head over to Biblical Womanhood for all the other Frugal Friday links!

More from Keeper of the Home

• Setting up a cash system- Part 2 | Keeper of the Home
• Fudge-it or Budget | Keeper of the Home
• What are your financial goals for the New Year? | Keeper of the Home
• Frugality with Food, Revisited- Part 1 | Keeper of the Home