Create a Budget Using The Envelope Method

If you are like most people, the thought of making a budget will send chills down your spine. The idea of calculators, excel spreadsheets, crunching numbers and constantly monitoring you checking account balance is enough to make people forget the whole issue altogether. Well, that is how so many people end up in bad debt situations – they simply avoided what can really be a simple task: budgeting using The Envelope Method.



The Benefits of Budgeting in Cash

Anyone who has opened a credit card and made a purchase they later regretted because they truly could not afford it will benefit from switching to paying for most of their expenses in cash. Even if you do not think you need a change, getting out of the habit of using a credit card is a great idea. Just think, every time you swipe that plastic for your lunch, you are essentially taking out a high interest loan just to buy a Big Mac! That is not the best use of credit.

Even if you currently use cash, you may need to find a way to monitor you spending better. You may end up running to the ATM a couple times a week or month, and unless you make sure you are going to fee-free ATMs, you could be racking up extra needless expenses.

How Does The Envelope System Work?

 The Envelope System is very simple, which is why it is such an effective budgeting tool. The reality is, if a budgeting plan is too cumbersome or difficult, it will be abandoned for whatever is easier. So, The Envelope System streamlines the budget process and it is something everyone can use, no matter what their income is.

The steps to creating a budget using The Envelope System:

  • Get the right tools. The first thing to do is get – you guessed it – some envelopes, a pen or pencil, and at least a rough idea of your monthly budget.
  • Figure out your cash flows. Now is the part most people dislike, but once it’s over, you will only need to make minor revisions from time to time, if at all – so this one-time investment in your financial future will really pay dividends in the long run! With your budget in hand, try to determine your monthly income and expenditures. Ideally you should have more income than expenditures. If that is the case, you should funnel the extra into a savings account, which can be done automatically at most banks. For example, let’s say you have $50 extra each month. Well, don’t find something new to spend it on, ask your bank to automatically withdrawal that amount to a savings account on a monthly basis.What if your expenses exceed your income? You will likely need to start making tough decisions and start cutting non-essentials like cable TV and eating out.
  • Categorize your expenditures. Chances are you have some expenses automatically paid for electronically, so look at what you have left over that you usually spend out-of-pocket and divide them into categories: food, gas, clothing/accessories, entertainment/travel, etc. Write the name of each category on an envelope.
  • Decision time! Now comes the part where you prioritize where you want to put your money. Obviously you cannot skimp on food and gas, those are usually fixed, then look at how much you want to spend on other areas. Once you have a number, get the cash and put it in the envelope.
  • Spending time! With your envelopes full, you are ready to go. You can be confident that you can spend ALL the money in your envelopes without going over budget! You can also save some of the money in your envelopes if you want to plan a bigger expenditure, but you can NEVER spend more than you have. That’s the genius of The Envelope System!
  • Repeat. You will repeat this process every month, and you can make changes along the way if you find you need a little more or less in certain areas, but overall, your budgeting woes should be fixed!
Thursday, December 31st, 2009 Budgeting

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