If you want to meet your financial goals, making a budget and sticking to it is a necessity. Even though you know you need a budget, knowing how to get started can be overwhelming. Should you use a pen and paper system? Should you invest in a computer program to help you track your expenses? One method that is growing in popularity is the envelope budgeting system.
How It Works
The envelope budgeting system requires that you use cash to make purchases rather than depend on debit and credit cards. Once you determine your budget categories, you assign an "envelope" to each of these categories. This can be either a real envelope or a virtual one. As you make purchases, you withdraw the cash from the envelope to pay for the expense. Once the envelope is empty, you cannot spend any more money in that category.
This system works very well for those that need a tangible reminder of how much money they have available in their budget to prevent overspending. You can also avoid the consequences that spending more than you can afford to might have on your checking account. You cannot spend more money than you have in your envelope. If you try to spend more, there is no overdraft protection like with your debit card that can rack up fee after fee with continued use. By using cash, you will also never have to worry about if a particular store or restaurant takes your card. Most places accept cash.
Many people might not feel as secure carrying large amounts of cash around. If your credit card is stolen, there are protections in place to recover at least a portion of what is taken from you. If your cash is stolen or lost, there is usually little hope of recovering it. Also, by using cash over credit cards, you will miss out on many of the rewards programs that are available for consumers that use them for everyday purchases. Paying with cash doesn't not leave an automatic record of expenses like using a debit or credit card does, so it may be difficult for some to keep track of where their money is going.
Hints and Tips
If you are interested in the envelope budgeting system, here are some tips for success.
- Go Cash -Consider only using the cash system for your variable expenses, like groceries, gas and entertainment.
- Auto-Pay Regular Bills - Set up automatic payments for regular bills that are always the same like your mortgage and cable.
- Simplify – If you have too many categories, you'll end up dragging around a bunch of envelopes whenever you need to run multiple errands. Try to simplify your categories so you only need one envelope for groceries and household goods.
- Write it Down – Use the envelope to write down your spending. Include the date, amount and what you bought. Put the receipt in the envelope in place of the cash you used. That way, you do not end up with an empty envelope at the end of the week and no idea where the money went.
Budgeting can be tricky, especially if it is your first time trying to control your expenses. Envelope budgeting presents a tangible way to keep yourself accountable for your spending. This system is not for everyone, but for those who need to learn financial discipline and don't mind working with cash, the envelope budgeting system can help you meet your goals.
Jessica Bosari is a freelance writer and blogger for various publications and her own blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools.com or about saving money, leave your comments in the form below or email firstname.lastname@example.org. Thanks!