Creating a budget and controlling one’s spending is a delicate balancing act. Monthly expenses, debts, personal savings, mortgage and taxes are some of the factors which affects the budget. In addition, most people are afraid to draw up a budget because of what they might discover. From debts to overspending, these are just some of the harsh realities they are afraid to face.
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Maximizing one’s monthly income is not a Herculean feat. Everything starts with a budget and listing the monthly expenses is the first step. Budget tracking is also essential since it teaches a person financial discipline. Another method in managing personal finances is the “envelope system”. It may sound low-tech but it helps people reign their spending and keep debt collectors at bay.
How does the “envelope method” work?
The system works by using humble envelopes. These envelopes are labelled with a specific category. Some of these categories include:
- Vehicle maintenance
After labelling each envelope, the cash is divided between each spending category. People need to observe and adjust while on the system. Some envelopes may have leftover cash or run out too soon. This system shows a person how his or her spending habits can affect the budget. Necessary adjustments to the budget can be done accordingly.
Getting started with the “envelope method”
Getting started with this system is quite easy. The first step is to review your current expenses. Check personal expenses for the last three months. This will give you an idea of how much you need to allocate each month.
Before cashing your pay check or withdrawing from the bank, determine the amount of money needed. The goal of this system is to use cash when paying for bills or expenses. Some bills, such as insurance, rent or utilities can be paid online. Do not forget to leave funds in your bank account to cover these. Deduct the amount needed for your envelopes from your account and withdraw it.
Calculate your monthly average spending before filling each envelope. Set a realistic budget to determine your expenses. Do you spend more money on food, gas or entertainment? See what category you can make adjustments on to balance your envelope budget.
Once an envelope is empty, do not take from other envelopes. You have to rough it out and wait until the next payday. It may sound tough but the whole idea is to teach you to be responsible financially.
Advantages of using an “envelope method”
The “envelope method” has its own set of advantages and here are some of them:
Avoid missing payments – Paying bills upfront is much easier as you do not need to keep track of them. Budgets kept electronically can sometimes be tough since receipts can be lost. The envelope system works because once you have paid for the bills, you do not need to track them anymore.
Teaches financial discipline -Sometimes, we spend too much on unnecessary things. This system teaches us to control our spending habits which leads to bigger financial gains.
Money becomes more tangible – In our credit card-centric society, we tend to overspend and become loaded with debt. With the envelope system, money becomes more tangible and it reminds us of what we have. Thus, we only spend on what we really need.
Helps prevent people from overspending – Using envelopes to create a budget prevents us from overspending. Since these envelopes have a set budget in them, you want to spend them wisely. It makes you think twice before making a purchase. In addition, it has been found that people tend to spend 15 per cent less when using cash instead of a credit card.
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A budget based on envelopes may sound archaic to some. However, this system has been around for decades and it works. It may sound strange at first but you will eventually get used to it. Stick to what you have and put away your credit card. Make your wallet fat and happy with the envelope method!