Are you having a hard time saving your hard-earned money every month? Perhaps it is time to consider the method of envelope budgeting. This money management strategy forces you to accurately plan your spending each month by only having access to a predetermined amount of money, and the goal is to teach you to have better control over your finances.
While the envelope budgeting method may not be for everyone as it only requires the use of cash, it is still a great exercise to help you develop a disciplined budgeting habit. How does the handling system work and is it the right choice for you? Here's what you need to know.
What is envelope budgeting?
The envelope system is a money management technique that allows you to keep track of exactly how much money you have in each budget category for the month by keeping your cash in physical envelopes. Once you've decided how much to budget for each category, you're only allowed to spend the amount of cash that is available in each envelope. Once you run out of cash, you will not be able to spend money in this category until the next month.
A recent study has shown that credit cards can often stimulate and increase the desire for money. In fact, the study also found that many people were willing to buy more expensive products with credit cards because the feeling of spending money is less immediate and less tangible than when using cash. With the envelope method, you avoid impulse purchases and possible overdraft fees associated with cards.
How to start using the envelope budgeting system
One of the best ways to keep track of your expenses and control your expenses is to use the handling system. While sticking to this budgeting method can take some self-discipline, it is easy to learn and can have a positive impact on your financial life.
1. Create categories and a budget
Rather than just grouping different spending activities under “Other”, it is important to create clear categories so that you know exactly where your money is going and how much is being spent. Some suggestions for categories include: groceries, utilities and rent, automobile expenses, and entertainment.
2. Label the envelopes
Now that you've decided which categories to include in your spending budget, the next step is to write the category names and budget amount on each envelope. This helps you keep track and stay organized.
3. Assign money to each envelope
Once you've received your monthly or biweekly paycheck, cash it out and put the allocated funds in each envelope according to your set budget.
4. Spend wisely
When it's time to shop for groceries or pay bills, pick up cash from the appropriate category or just take the envelope with you on your trip. Think carefully before making any purchase because once you have used up the money in an envelope, there is nothing you can do without going over budget.
If you have money left at the end of the month, you can carry it over to the next month or use it to replenish your emergency fund.
Free printouts for the envelope budgeting system
To help you get started with the cash handling system, we've added free hard copies that you can download and print out. To make your own money envelopes, just cut, fold and glue according to the instructions.
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