Do you remember the time your parents used envelopes to allocate your family’s expenses after they get their salary? They have specific envelopes in each financial aspects of the family. The same system holds effective up to this day. Envelope system is very effective and easy to use in doing your budgeting. My wife and I are doing it since we started raising our family. It keeps on improving as we improve our finances. Personal finance on budgeting is very simple, here are some tips on how you can be successful in budgeting using this system.
1. Assess your current budget. My wife and I discussed about on how to improve our current system and we came up of practical solutions. One requirement you need to have is to assess your budget status right now. If you do not have a budget plan yet, monitor where your money is going for at least a month by writing down all your expenses in a notebook. Even the tiniest bit, you should write it down. It might be tedious at first but you will be practicing the habit of monitoring where your money goes. Once you quantify the expenses, you can make an allocated amount for each expenses which will serve as your budget. You can test this for a month and streamline it as you go along.
2. Allocate money on the envelope based on your budget. The strategy is very simple. After you have assessed you current budget, make sure you allocate envelopes in all aspects of your finances like investments, emergency fund, paying off debts (if you have any), insurances and expenses. Put a label and the amount in each envelope so that you can monitor the amount you need to replenish after the month is finished or new set of income comes in.
3. Never get money from other envelopes. What to do if the money in an envelope is all used up? Many times before, my wife use the money from other envelopes when we run short from other envelopes. We realized later that this act defeats the purpose of the system. If you used up the money in one envelope, it means that your budget for that is finished. It does not give you any authority at all to touch other envelopes you allocated. You need to discipline yourself not to fall into the temptation to get from other envelopes. Resist yourself to spending more than what is inside the envelope.
4. Reward yourself when there is money left. If there is money left in the envelope, Congratulations! This means that you save a portion for that budget. Reward yourself to use it for leisure but not too much. Or you can use it for next month making your allocated budget bigger than the previous. You can also use the money to add up on your investments or paying your debts sooner. In this way, you will not be deprived of yourself not enjoying your hard-earned money. You are doing this anyway to be happy and have a peace of mind.
5. Online budgeting tools you can use. There are plenty of online budgeting applications you can utilize to incorporate your manual envelope system especially nowadays that people are always mobile. I am using a mobile app that suit my needs whenever we go out. This measures the expenses vs our budget for a specific financial aspect. I can categorize also our credit card spending vs paying it with cash so you can have them properly monitored.
The key habit that will be developed using the power of envelope system is the discipline to stick to your budget plan. It will be difficult at first but with consistency and persistence you will be successful in budgeting. Once you control your budget, this can help a lot in building your wealth in the future.
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I disagree with Eze. Cash is fine as a envelope system and studies have proven that the physical connectionto “breaking” a $20, $100, or other bill causes an emotional response that limits spending. Credit and debit cards often cause overspending. Cash is not anymore risky than a credit card. No one with a cash envelope system is carrying around hundreds of dollars. Even if they were no one can see into your wallet. Most people use credit cards because they have no cash!
I track our categories with ynab (you need a budget). I’m not a big fan of cash as I tend to lose it 😄😅
Hi Mimimalist Mom, Thanks for the comment. Nowadays, carrying cash as well is risky that is why most of us tend to use credit/debit cards. You can actually automate some parts of envelope system thru online apps on those aspects that cash can be optional. Discipline is the key to be successful in budgeting whether it is cash, debit or credit cards. You need to stay within your allocated budget. Thanks again for dropping by my blog.