envelope budgeting

Long before there were complex computer software programs, people would rely on a very simple concept to make sure they kept their spending in check, envelope budgeting. This old fashioned approach to budgeting may be simple but if you put it to use for your household budget you’re likely to be pleasantly surprised at how effective it can be.

The first thing you need to do is to figure out what your monthly expenses are. Subtract that amount from your monthly income. Hopefully after doing this step you will find that you are living within your means and that you spend less than you make.

If you find the opposite, that you aren’t living within your means and that you are actually spending more than you make, it’s time to reign in your spending habits. To do this take another look at your budget and identify those areas that you are overspending in. It doesn’t matter if you spend too much on expensive coffee, you eat out too much, or you just buy too many electronic gadgets or shoes, once you know where the financial leak is you can plug it.

To use this budgeting system all you need to do is concentrate on the areas of your budget where you are using your discretionary income. You probably don’t need to use this method for your mortgage, car, or other loan payments or for your utility and grocery bills.

Figure out which areas of your budget you need to work on, for example, dining out and clothing expenses. Get a plain full sized envelope, one for each category that you have a little trouble with. On the outside of the envelope write the name of the category. So if the envelope is for your dining out money, put ‘dining out’ on the outside of the envelope.

At the beginning of the month go to the bank and get cash, the amount you get will depend on the amount you have budgeted for your spending. For example, if you’ve decided to work on your clothing and dining out spending than you will have two envelopes, one for each category. You will fill each envelope with the amount of cash you have budgeted for the month. So if your monthly dining out budget is $300 you will place $300 in your ‘dining out’ envelope at the beginning of the month, every month.

Now whenever you go out to eat you can only use the money from that envelope, and when it’s gone you can’t eat out any more until next month. Do not take money from other envelopes.

If you are willing to make some daily changes in your spending habits so that you can get your finances under control once and for all, using the envelope budgeting method can be extremely simple yet effective. Just like any budgeting system you choose, the success of the system will depend 100% on how diligent you are about sticking to it. If you’re going to ‘cheat’ on your budget no system will work for you. Stay committed to your financial goals and follow the system and you’ll find that you’re money situation looks much better at the end of the month than it used to.

Category: Personal Budget
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