Having a budget and using a budgeting system are great ways to learn exactly where your money is going. But the tools are only as effective as you choose to make them. It is not like when you were a child and there was a punishment coming if you broke a rule.
Well, there is a punishment in the form of being forced to use credit or being broke until you get paid, but that is more a result not an added punishment. So it can be easy to let yourself slide and not record a splurge on an expensive latte or a round of drinks on Friday night. But these little cheats are not hurting anyone but yourself.
You are investing the time to use the budgeting tools but then not getting the benefit of the balanced budget. If that sounds all too familiar, then you might need to try the envelope budget system.
Another Name for the Cash System
The envelope budget system is pretty much deciding that you are going to pay for everything in cash and placing the cash in the appropriate envelopes which you have labeled with different categories. The categories would include food, gas, household items, housing, utilities and allowance or discretionary money and so on. Each time you get paid, you divide the money up into the different envelopes. Some of them are easy, you know what your rent or mortgage payment is each month. Other items like food and gas can be estimated by looking at past bank statements to see where you were using your debit card and for how much. But you need to only use cash for all of your purchases and bills for the month. When each envelope is empty, then you have completed your spending in that category for the month.
Extra Cash is Your Decision
You will have one envelope that you use for your entertainment, fun or discretionary spending. This would also be the potential cash that you could choose to place in long term savings. It is also the envelope that gets most people into trouble. They decide to spend a little extra somewhere and very soon that extra money is gone. Now is the time when you need to remind yourself that the entire month of work on your budget is wasted if you cheat and spend too much money on fun or decide to use a credit card for something that is not in your budget.
The first benefit is that this is a very simple system and it costs only about a dollar to get a stack of envelopes and get started. There is no investment in software or need to keep entering all of your purchases on a spreadsheet. You open the envelope, take out the money and spend it. When the envelope is empty then the money is gone and you are done spending. It can also be a great tool for you to see where your money is going and help you to make more thoughtful decisions about how you are spending it. If you notice that you are getting a lot of money out of the food envelope, then you might make a conscious decision to cook at home more and eat out less. You can also see which areas you might be budgeting too much for such as gas. If you regularly have money left in that envelope, then you could choose to add it to savings when in the past you had just spent is as left over money.Saves on Fees
Saves on Fees
Have you ever gone to the store and spent much more on food than you expected to, only to realize that you overdrew your account? Not only were you out of money, but when you did get more money to deposit into your account then part of it was swallowed up in overdraft fees. That is never going to happen using the envelope budgeting system. In fact, you will be able to see very clearly that you are getting low on funds in a category as the envelope get thinner and thinner. Using cash instead of a debit or credit card forces you to see and handle money each time you want to make a purchase. It gives some of the value and meaning back to money.
Because you actually have money in your hands each time you spend it and because you are constantly looking at the envelopes, you have an idea of how much real money is in each envelope or category. It helps you to keep a running total in your head and to have an idea of the big picture of your monthly finances. Unlike entering a bunch of purchases into a spreadsheet each month and being surprised when you see how much was spent in the different categories, it is very easy to keep track of which envelopes are getting empty. You will always have a good idea of where you are spending your money.The Drawbacks
It would be dishonest to say that this is a perfect system. It can be difficult to get the whole family to use the cash system and stick to it, but if is much easier for a single person to commit to the process. Also, you need to get cash for each of your paychecks and then break it down into all of the correct envelopes. It can take a little bit of time to get used to the process. It is also a big drawback for people who are trying to build up points using credit cards. But foregoing a few months of points is a good trade to get a handle on your spending. The envelope budget system is not a plan that you are likely to use for years but it is a good exercise to use for a few months to get a better idea of where you are spending your money.