Let’s tackle a common problem that people have in maintaining a viable budget. Many consumers use budget tools to create a good budget that tracks income and expenses to ensure you don’t overspend. For some, the problem comes in the execution of that budget. Overspending is a tough thing to fix, especially when debit and credit cards are so common. In addition to encouraging thoughtless purchases, your debit card makes it hard for you to keep track of your balance as it declines.
The envelope budgeting system is a way to fix the problem of spending too much. It easily lets you see what you spend and limit your expenditures. Here’s how.
The envelope system eschews electronic money and tracking for something tangible. Cash is king in this system. You need cash and envelopes to get started.
Step 1 – Discretionary Income
Figure out your discretionary income and how much you have left over after the bills are paid for. Don’t forget to including your savings and investment goals as bills.
Step 2 – Budget
This method asks you to review the amount of money you have left and make a budget for how you will spend on it. Think of items you commonly buy, like food, as well as categories you typically spend in, like entertainment. A common arrangement is food, entertainment, household, eating out, clothing, fuel and rainy day money.
For help creating your categories, take a look at your bank statements to see what you are spending.
Step 3 – Make Envelopes
Make an envelope for each category and label it as such. After you get paid and pay the bills, put a budgeted amount of cash in the envelope.
Step 4 – Use Cash Only
Once you create your envelopes and fund them with cash, you will have converted yourself to a cash only system. If you run out of cash in any envelope, that means you met your budget for that period and cannot spend more in that category until you get paid again.
Step 5 – Extra Money
One advantage to this system is that you can see what you spend and make adjustments. The process tends to encourage you not to run out of cash. This opens up a great chance to save money. Whenever you have money left over, take the money and add it to your savings.
How the System Benefits You
This system is great because it works. It works because once you run out of cash, you cannot overspend by simply pulling out a plastic card.
- The system will encourage good habits and discipline.
- The envelopes can encourage the creation of an emergency fund. The money may not be designated for emergencies, but it can be immediately converted if your refrigerator breaks down, for instance.
- The envelope system is completely tangible and tactile. It completely takes your money management offline, which is what many people need in order to conceptualize money. It also prevents you from making wasteful or impulsive purchases. In reality, once people watch the cash disappear, it tends to make them hesitant to spend anything, which automatically reduces how much they spend.