An envelope budgeting system is an older, traditional way of ensuring the basic objectives of a budget are met – namely controlling spending, saving for the future, and avoiding credit card debt. Some people find this tried and true approach easier to use than other systems for their budget management needs.
If you have come up with a personal budget to maintain your financial equalibrium, but have difficulty actually sticking to it each month, a "tried and true" envelope budgeting approach may be just the ticket.
For some, using envelopes for budget management works because it forces people to curtail discretionary spending, which is where money tends to slip away.
For example, say you have already categorized your monthly expenses, and prepared your budget based on your current income, savings and other goals. Some of your expenses are fixed, which means they stay the same from month to month. These fixed expenses include your rent or mortgage and car payment.
Yet, other expenses are variable, like your groceries, dining out, entertainment, household purchases, clothing, and others. These are your discretionary expenses, and where you can easily overspend, if you are not careful and watching where every penny goes.
That's where the merits of envelope budgeting come into play. Using a budgeting envelope forces you to use cash for these discretionary expenses. And yes, you keep the cash in designated envelopes for easy management and tracking.
How to do Envelope Budgeting
For each discretionary or variable expense category you have identified in your budget, create an envelope. Label each envelope with the appropriate budget category. Do this for each pay period or on a monthly basis.
Then, cash your pay check. Put money in each envelope you created, according to the amount you designated to spend in your budget.
Under your category label, write down the amount of cash you put in the envelope for that pay period or month. Each time you take money out of an envelope, adjust the total and write down how much cash remains to be spent.
Every time you need to shop for something, make a list and take the estimated amount of cash you need from the corresponding envelope. This can get a bit tricky if you are shopping for multiple items at once. Use a pen and paper to track the amount of money you have taken out of each envelope, if it is helpful.
Once you return from your shopping trip, put any extra cash you didn't spend back in the correct category envelope. Adjust the total amount of cash remaining that you wrote on the front of the envelope, as appropriate.
On your shopping trip, if you overspent in one category and underspent in another, shift money between envelopes, as needed. Then once again, update the balance written on each envelope.
When You're Out of Money
What if you have no money left in a particular envelope, but think you still have to make a purchase in that category?
You either need to postpone that purchase until your next pay period or shift discretionary money from another envelope to this envelope. In this case, you are voluntarily sacrificing spending money in one area to cover more pressing expenses.
You are in control of how your money is spent. But when all the money is gone, spending must stop.
Envelope budgeting may take a few months to get used to doing. So, give it a chance and let the budget process auto-correct over a period of three or four months to completely get the hang of it.
Always remember to adjust the total that appears on the front of the envelope. If you forget to to this, the envelope budgeting system will not work for you.
Additionally, there are some software programs on the market that enable you to use virtual envelopes to keep track of your budget and spending. Essentially, the computer based system takes the same approach. Though, there is no substitute for having the envelopes and cash in hand to help ensure successful budget management.
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