How to use the old “envelope budgeting” technique

By | November 2, 2015

We’re not very good at budgeting, handling our finances or putting money away for the future. This is why the national savings rate is in the single digits, half the country lives paycheck to paycheck and most don’t have an emergency savings fund. What the heck happened to our fiscal aptitude?

Despite the various money management systems, software and mobile apps, consumers can’t seem to get a grip on their own finances. Perhaps households have to resort to old-fashioned systems to improve their financial situation. Don’t know where to begin? Maybe you should check out the envelope budgeting technique.

A lot of financial gurus, such as Gail Vaz-Oxlade and Dave Ramsey, are encouraging people in monetary destitute to look at some of the ways of saving money. Many of the suggestions were common in the days of antiquity, the pioneer times or even prior to the advent of Microsoft Office. This is indeed a case of what’s old is new again.

Here’s how you can begin the envelope budgeting system:

envelope budgetingStart a Budget

Grab that box of paper receipts, download a spreadsheet from your checking account, bring over your cup of coffee and sit down to start constructing a budget. Don’t be intimidated, don’t be frightened and don’t be nervous. Just relax.

The budget should include several categories, such as rent/mortgage, utilities, groceries, telecommunications, entertainment and the like. The trick in this aspect is to determine the exact amount of how much you spend on these disbursements and then to round up so you trick yourself into having extra money at the end of the 30-day cycle.

Write a Category on Every Envelope

Upon completion of the budget, take out how many envelopes you need and write down every single category on the front of every single envelope. You can select the size and type of envelope, but you should have an envelope that can fit in a purse or a wallet or a pocket. Do ensure that the envelope’s category is simple to read (perhaps a black marker).

Transfer Part of Income Into Each Envelope

You have your envelopes ready so now is the time to allocate your income into each envelope. Before you do this, take a gander at your income and make sure that it’s correct. Afterwards, divvy up the money and place it inside every envelope. Aside from housing-related costs, most of your categories will be spent in cash and in small amounts.

Don’t know how to start? Well, let’s say that you have a $500 budget for groceries each month. What you do is to transfer $250 from your first paycheck into the envelope and then another $250 from your next paycheck.

You do not touch this money for any other reason than groceries. You must practice self-control.

Use Envelope’s Money for the Category

If you’re heading to a restaurant or the movie theater then take money from that category’s envelope. You calculate how much you’re going to roughly spend at the restaurant and then write it on the back of envelope. This is important to remember: if you have run out of money then you can’t take money from another envelope to pay for it. You just have to do without.

Pay Down Debt With Extra Cash

Did your envelope for dining out have some extra dough? Did your envelope for groceries leave you with an additional $50? Congratulations. You should use this money to help pay down your credit card debt, line of credit or any other kind of personal loans with bad credit you may have that have a large interest rate. The less debt you have the more you can save.

Reward Yourself…Maybe

Sometimes, the best way to continue on with something is to reward yourself. Surprisingly, a lot of the personal finance experts recommend avid budget users to reward themselves if their successful in their plight. If you came under budget in your first month then use the extra dough to buy yourself a latte or buy a t-shirt. Or… you can just pay off your debt and loans.

Note Down the Positives/Negatives of the System

As the months go by, try to maintain a financial journal. With this journal, you should write down your thoughts and the various positives and negatives of the envelope budgeting system. Eventually, you could even fine-tune the envelope technique and improve upon it. Maybe you can even write a blog about it.

The polls say that just one-third of United States consumers keep track and monitor their finances. This is bad news, and an obvious reason why so many are living paycheck to paycheck and just one financial emergency away from a household collapse. Indeed, Rome wasn’t built in a day, but an envelope budgeting system can do wonders for your bank account and can help restore your financial picture.

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