Envelope Method of Budgeting
There are many different ways to budget your money. For those who lack will power or often go over budget, methods like the envelope method work wonders. This method teaches budgeting by strictly cutting off your resources and allowing you a very small amount of money to work with each week. It sounds harsh, but by the end of just a few months you will be living like you were never on a budget and saving a lot of money at the same time!
The Envelope System, popular years ago, involved setting up envelopes, allocating your monthly income to expenses, and then putting the required cash into each envelope. The term Zero Based Budgeting came about because all money was allocated to envelopes and therefore “budgeted to zero” each month.
One of the best ways to manage your budget is to use The Envelope System. This budgeting method is so effective that it has become one of the recommended tools for personal finance.
The Envelope Budget System in Eight Easy Steps:
1. Start by tracking your daily expenses. It just takes a few extra minutes each day.
2. List down all you monthly expenses. Consult your daily expense notebook to check some items which you might have forgotten.
3. Group the list into categories. Make sure that you include everything. You can start by grouping them into general categories such as Shelter, Food, Clothes, Utilities, Transportation and Personal.
You can also choose to further divide them into subcategories until you have a comprehensive map of where exactly your money goes every month.
4. Get some envelopes and label each of them with the expense classifications you defined. When you’re done, add one more envelope and label it, Pay Yourself First.
5. Next, create a budget. Distribute and allocate your current income into the envelopes. Make sure that you fill in the Pay Yourself First envelope before the others.
6. Keep your envelopes in a safe and secure place.
7. Plan your day ahead and bring the envelope which you might need for your expenses. You can choose to bring just a certain amount and not the whole envelope for security purposes.
For example, if you’re planning to go to the mall with friends, instead of bringing your Food Envelope, which usually contains a large sum, just get a few bills. Do the same for your Transportation and Personal envelopes.
8. At the end of the month, whatever is left in the envelope is carried over and added to the next month’s budget. That’s why it is important not to spend everything in the envelope, so that you can save up for bigger purchases and unexpected expenses.
For example, if your monthly clothing budget is just $20.00, then you will be inclined not to spend it if you want to buy a $40.00 pair of jeans next month.
Additional Notes:
• Put your receipts into the envelope from where you took the cash from. That way, you’ll be able to easily track exactly where your cash was spent on.
• Instead of carrying over what’s left towards next month, you can also choose to deposit the money left into your savings account.
• It is recommended that you use your income from last month for your current month’s expenses. All your earnings for the current month should be kept and saved for budget allocation next month. If this is not possible then try to adjust your spending habits until you have achieved this.
• Try not to “borrow” money from other envelopes. You should discipline yourself to spend the allocated money only for its assigned category.
Remember that this is a dynamic process; the Envelope System entails constant planning, tracking, analysis and adjustments to your budget allocations and spending habits until you have successfully gotten yourself out of debt and comfortably living within your means.
And lastly, the best part of doing this envelope system is that you don’t have to worry much about saving money because your Pay Yourself First envelope is automatically doing that for you.
These are few advantages of the Envelope System:
• Those who do better with the physical representation of money can visually see where the money is going.
• You can’t over-spend with this system. If the envelope is empty the spending is done.
• It eases the temptation to dip into savings. Since you’ve already allocated the money there, you have to make the most of your play money
One thing to keep foremost in your mind when setting up your family’s budget is to make it a workable budget for you. Don’t make it to strict that you are setting yourself up to fail. If you slip and it doesn’t work out, try again next month. Don’t give up! All new things take time and patience to learn.
References:
http://ezinearticles.com/?The-Envelope-Method&id=257722
http://www.debtsteps.com/envelope-system.html
http://fitzvillafuerte.com/envelope-budget-system-tutorial-video.html
