The envelope budgeting method is a tried and true, if not somewhat outdated, way of tracking your finances. Before going into how to use this method in the modern world, I thought I’d present an overview.
In order to fully appreciate the method, let’s return to simpler times when cash was king. When you got your paycheck, you’d cash it and use that cash to pay for your expenses. Instead of just having one pile of cash and pulling from that pile to pay for all expenses, the envelope budgeting method was developed.
Simply stated, you put a portion of each paycheck into different envelopes, each labeled for a particular expense. So a portion of your cashed paycheck would go into a rent envelope, another into a food envelope, another into a gas envelope, etc. Each spending category had an envelope and got a portion of each paycheck.
When it came time to go to the grocery store, you would take money from the grocery envelope and use it to do your shopping. This method forced you to spend within your budget, because once the envelope was empty, you had to stop spending in that category.
To setup your envelope budget, you needed to estimate what your expenses would be to determine what portion of each paycheck would get added to each envelope. As time went by and you noticed that one envelope consistently had too much or too little to cover expenses, you could update the amount that went into that envelope, or transfer from one envelope to another.
Saving for unexpected expenses, a vacation, or any other purpose was easily accomplished by adding an envelope for that category. You may have only been able to add a small amount to a vacation envelope, but by having one, you would have been consistently allocating money specifically for that purpose. Having an envelope for “savings”, also allowed you to make saving a part of your budget and “pay yourself first.”
If you like the idea of envelope budgeting, you’re not alone. Its popularity can be attributed to its success. It forces you to plan your spending, and show restraint when the money runs out. The main problem with the envelope system in the modern world is that we have become a cashless society. Imagine trying to keep track of expenses, credit cards, online bill payments, and the many other ways we deal with money by using a cash based system. It just doesn’t work. There are a number of ways to use this method in the modern world, which I will address in part 2 of this post.
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