What is the envelope method?
The envelope method is as simple as it sounds - it is a way of budgeting that requires you to put allocated funds into specially marked envelopes. This system has been around for years, but is always being revamped to suit new trends. For those new to budgeting or who have found other systems to be ineffective, tedious or complicated, the envelope system is ideal!
Why should I try it?
If you find yourself overspending, running yourself into debt or need to save towards a goal, you have to budget. With the envelope system, you have very clear line-of-sight on how much you’re allocating to each aspect of your budget as well as how much is being spent. This allows you to reign yourself in, if you seem to be overspending.The envelope system is also a great way to control your spending during special occasions such as holidays, trips or big events. You can set aside money based on expenses you think you will incur during this period and only spend those allocated funds.
Before getting started, look back at past spends to get an idea of your previous spending habits. Take this time to re-evaluate your spending habits by asking yourself:
Remember, just because you’re spending on it does not mean you NEED to be. You can make lasting changes to your spending by making simple changes. For instance, instead of spending $700 on buying lunch, you could save $300 by using items you have at home to prepare your own. Go through old receipts and identify the areas that need serious adjustment, and make realistic changes
Once you have an idea of what areas you need to budget for, start labelling your envelopes. Some general areas to include are:
Try to include ALL areas where money is being spent. The idea is not to reduce your quality of life, but rather to improve it by improving your spending habits. After identifying these areas, start to allocate money based on the information gathered through your previous assessment. Be realistic. After assessing your past spends, you should be well-informed and able to set a realistic budget. Avoid setting it higher ‘just in case’. The system only works if you intend to stick to the budget given.
How to make it work for you
While it is important to set a realistic budget and not one that accommodates the ‘just in case’, it is also important to assess the budget you’ve set. A simple way to do this is to collect all receipts, where possible, and add them to the assigned envelopes. At the end of your budgetary period (weekly, fortnightly or monthly) evaluate your spending habits. As tempting as it might be, avoid pulling money from another envelope. If you properly track your spending, you will quickly see if you are running low in an area and be able to make changes to keep within your budget. During evaluation, you can better see where general adjustments need to be made. Perhaps your original budget was not realistic enough. If you find that you under-spend in an area, you can add that extra money to your savings or reduce the allocated funds the following month.
Don’t be hard on yourself if at first it takes some getting used to. The system works only if you make it right for you, and this might require some trial and error. Give yourself three months to properly get on track and hold yourself to that deadline.
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