The Envelope System of Spending and BudgetingSep 07, 2018
You make a budget every month using tools like Excel or Mint.com and have been diligently putting in all your income and expenses. Yet, you get the same result: you continue to spend more than you budgeted.
Yes, you make an effort to create and maintain a budget, which is commendable, but the problem is, “there is nothing holding you accountable to that budget you make.” If eventually, you succeeded in keeping up with the budget, there is no reward, and also, there is no repercussion if you fail to keep up with the budget.
Are you looking for a way to make your budget work for you, and also how you can hold yourself accountable to it? Then the envelope budgeting system is a perfect option to work with.
How the Envelope Budgeting System Works
The beauty of the envelope budgeting system is that it’s very tangible. Your cold hard cash (actual dollar bills) is what you use to control your spending and once you run out of cash, you stop spending. Below is how it works:
1. Know your Discretionary Income: the very first thing you should do before starting the envelope system is to know how much you are left with after you settle your bills and put money aside for savings and investments.
2. Come up with a Budget: now that you know how much cash you have at hand, come up with how to divide it among the different budget categories in which your monthly spending varies. Some of these categories include household items, groceries, clothing, gifts, entertainment, gas, and so on. Let me give you a little tip on this; look out for your bank statements to get an idea of how much you have been spending as regards these areas.
3. Get some envelopes and Fill Them with Cash: get an envelope for every category and indicate the category name on the front. Then put in the budgeted amount of cash in those envelopes after each paycheck.
4. Spend Cash Only: as soon as you run out of cash in an envelope, that indicates you have met your budget for that pay period and you can’t spend any more in that category until the next paycheck arrives.
5. Settle your Debt with Extra Money or you Save It: in case you have any debt to settle, use the money left over from your envelopes to pay it off. But if you are debt-free, divert your extra cash into savings.
Benefits of the Envelope System
• It is real: the exciting part about the envelope budgeting system is that it purely work. If cash is what you pay with, and you run out of cash, you cannot possibly spend more than you budgeted. This budgeting system has been around for a long time for good reasons.
• It Will Boost Your Level Of Discipline: being disciplined is what makes us better people, whether it is with the way we spend, eat, or our productivity at work. The more you learn to be disciplined, the easier it becomes to take responsibility for other areas you want to improve.
• It Can Be Used In Case of an Emergency: Many people carry plastic, instead of cash, which can be a problem in case of an emergency. However, the money in the envelope system is not meant for emergencies, but you can always use it for one¬. Take, for example, your car stops in the middle of nowhere and you need to pay for a tow of pay for a ride home.
• Your Budget Turns Out To Be Tangible: the idea of money is much more tangible if you use cash instead of plastic. You can easily spend more than you plan with a credit card. But with an envelope cash, you will work with your budget as you will be reminded of it whenever you take some cash to spend from the envelope.
• Wasteful Spending Is Lowered: using the envelope budgeting system allows you to be more likely to think through your purchase. When you see how your money is disappearing before your very eyes, you are less likely to spend wastefully. To back this up, people spend between 10% to 15% less when using cash.
• You Won’t Miss a Payment: using the envelope budgeting system allows you to pay upfront and you have nothing to keep track of. Nevertheless, using an electronic program to do your budgeting make it easy to miss entering in purchases.
Disadvantages of the Envelope System
• Getting the Whole Family on Board is Tough: some people don’t see using cash to a big deal. They prefer the simplicity and ease of using plastic. Before the envelope budgeting system can be successful, the whole family needs to be in support of it before it can work. If they are not fully committed to making it work, it won’t.
• You Must Visit the Bank or ATM to Withdraw Cash: going through this is just another errand you have to run in your busy life. Before you can use this budgeting system, you will obviously have to get the cash you will stuff your envelopes with from somewhere.
• Starting Can Be Confusing: following the process I described seems pretty straightforward, but you can’t always avoid situations that can be confusing. Let’s take for example you make a purchase under three different categories, you will probably need to get the cash to settle the bills from three different envelopes. So, you will have to experience a learning curve in order to figure out how to stick to your categories.
• You Won’t Be Entitled to Credit Card Rewards: with the envelope budgeting system, you miss out on card rewards because you won’t be using your credit card that much or you might end up not using it at all.
Bottom line: we live in the electronic era, carrying paper envelopes of cash around might seem outdated. Nevertheless, don’t consider it as being outdated. The most important part is that it works. As long as you do with the rules and go against using plastic, it will work. Even if it happens that you run out of cash, you can’t overspend since you don’t use plastic.
© The Prosperity Process, LLC
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