Adopt a new philosophy for the new year: make every penny have a purpose

Which will you promise to get right or give up in the new year?

People say services for fiscal fitness rate above services for physical fitness when making resolutions, according to a survey by Allianz Life Insurance.

But when asked what resolution for 2010 they are most likely to keep, more people said they would stick to a diet and exercise plan. I guess I shouldn’t be surprised that when asked whether financial planning was part of their resolutions, 33.6 percent answered, “I don’t have enough money to worry about it.’’

You always need a plan for your finances, whether you have a yearly income of $20,000 or $200,000.

Here’s a mantra I want you to adopt for the new year: “Every penny should have a purpose.’’ This means you need a plan for your money. As I go through my mail, I’ve pulled out questions from people who want an action plan.

“Please tell me about the envelope system,’’ one reader wrote. “I make $45,000 a year. I am in debt for $12,000. I overspend on food. I use my check card a lot and, well, I get in trouble with it.’’

I learned to budget using envelopes from my grandmother, Big Mama. To get started you don’t need much, just a pencil and envelopes. On payday, you put cash into various envelopes. You don’t have to stop automatically depositing your paycheck. But you will need to make a trip to withdraw cash.

Label each envelope with an expense category such as gas, dining out, or entertainment. So, for example, if you’ve budgeted $500 a month for food and you get paid every two weeks, take $250 and put it in the envelope marked groceries.

Then when you go to the supermarket, you pay for your purchases using the cash in the envelope. Subtract what you’ve spent and keep a tally on the envelope. If you are married, create an envelope for your personal spending allowance. Of course, this means agreeing on a set amount. Using envelopes will help reduce arguments that occur when both spouses are withdrawing money from the ATM without consulting each other.

Once the money in the envelope is gone, you can’t spend until you get paid again. And this is where the discipline kicks in. Don’t borrow from one envelope to make up for a shortfall in another category. Don’t use credit to carry you over. Live on what you’ve budgeted.

When all your money is lumped into one account, it’s hard to see when you’re close to going over budget in one area. But using envelopes, you can see the cash dwindle. If you have money remaining, you can keep it for the same category next month or apply it to debt or put it in your savings.

I’ve recommended this system for people who have trouble sticking to a budget or who can’t control their spending. They often resort to using a credit card - which I suggest you remove from your wallet. If you’ve been using a debit card, take it out too. Sure, the envelope system is old-fashioned, but it works.

Michelle Singletary is a columnist for The Washington Post.