Ever since the Great Recession happened in the early 21st century, households have realized the importance of money-saving and getting their personal finances in order. Inspired by financial experts such as Gail Vaz-Oxlade and Dave Ramsey, budgeting methods like the ‘envelope budgeting system’ became the forefront of money-saving techniques in many households.
That said, most households in the US don’t actually maintain a budget. Figures emerging from polls such as the 2013 Gallup poll that shows – only 32% create a budget to keep track of their income and expenses. This is quiet an unearthing piece of information, considering the majority of families in the US live from pay check to pay check basis, saving very little if at all. Surprisingly, for a country which boasts the residence of several mainstream financial companies, money-saving websites, financial software, talk shows, smartphone finance applications and more are yet to realize the essence of maintaining a personal budget.
What is an ‘Envelope Budgeting System’?
The envelope budgeting system involves the use of an envelope or container to collect money to be directly allocated against upcoming expenses over a period.
By way of an example, let’s assume you spend $300 on transportation each month. Next, you write down the word “transportation” on an envelope and you have accounted for that monthly expense. Once you have received your monthly paycheck from your employer, you simply take the $300 from your paycheck and drop it into the assigned envelope.
This method provides an easy to use and understand system of budgeting which most families can easily implement. Sophisticated applications or calculations are not required, yet the benefit is clear.
Now, that we have attained a basic understanding of the envelope budget method, we should be inspired to start our own budget or at least to learn more. In the next sections, we will look at the process required to create an envelope budgeting system.
Preparation for Your Budget
Creating a budget is easy, so before we start on our monthly budget, make a cup of tea, sit back and ensure a pen and paper pad are not far from hand. Before embarking on your budget, it is important that we understand our current income and expenditure. It is only with an understanding of our current spending that we can budget successfully.
To start, it’s a good idea to review some of your old bank statements to rewind and recollect all the expenditures you have to make every month. As you are reviewing the different expenses, start to consider how we can group or categorise these expenses. You may even start to realise that you overspend on certain areas that you had not realised. As we gather more and more information on how we spend our money, we become more financially savvy and above all financially aware. Don’t forget your income, it’s important to understand our monthly income to fully create an effective budget.
With your pen at hand, start making a list of you common monthly expenses and defining expenses categories from your spending. Assign each expense to a category to ensure all categories are identified. Remember, we will have some automatic payments made from our bank account, it’s important to factor these into our budget even if we don’t have an envelope for them.
At the end, you should have identified a list of expense, their categories as well as attaining a clear idea of how much you spend on average on each category. Some common budget categories include automobile, childcare, clothing, groceries, entertainment, loans, rent, education, insurance and household.
The budget goal plays a big part in budgeting. Some people budget simply to keep a household running smoothly, others budget for travel, others to buy their first car or simply to create savings. Whatever your reason, it’s important to identify goals for your budget. Consider your goals at this point and write them down. Budgeting is not easy and it’s important to keep sight of your goals when difficulties arise.
Now with an increased financial viewpoint, document your income and identify overall category expenses for the month. It’s important that your income and expenditure balance, else spending will have to be financed by credit.
Label Your Envelopes with Expenses Categories
You have now complete the preparation required to create a budget. Next, pull out some envelopes and label them with each category of expenditures identified from your earlier review. You can use envelopes of any size; however, it’s a good idea to ensure they fit into your purse, wallet or handbag. Next, label each envelope with the category identified as well as the amount of intended spending for that category for the month.
It’s important to consider expenses such as bank charges, loan repayments or standing orders, which could be paid automatically from our bank accounts. Any automatic payments should have been identified in the review stage when we reviewed our bank statements and factored into our budget
At this stage, one method often employed by successful budgeters is to over-assign the amount required per month to a category. Let’s imagine that we have reviewed our last 3 months spending on groceries and we have identified that we spend on average $400 per month. If we assign $450 of our monthly income to the envelope that will be marked “Groceries”, we are then creating an invisible saving. That said, if we are disciplined enough, we can simply create an envelope category called “Savings”.
Assign Cash/Cheques to Your Envelopes
Having decided what proportion of our income will be allocated to each category. We must next assign either cash or cheques to each envelope to accommodate our spending.
Once we have assigned the cash or cheque to each envelope, it’s essential that we do not dip into the envelope for discretionary spending. Of course, we will always have the scenario where we see some item of clothing we would like to purchase but just haven’t budget for. It’s important that we refrain from additional spending and focus on our goals. Remember if all goes well, our financial situation should start to improve.
Implementing the Budget System
Now that we have reviewed our financial position and allocated income to the envelope, next it’s time to implement the budget. Organisation is key, always try to ensure that you have brought the correct envelopes with you each day and you are not using the incorrect envelope for purchases.
As you spend the money allocated to each envelope, note down the amount of money spent on the outside of the envelope, details of the spending and also update the envelope balance or amount remaining in the envelope. This will help you keep track of how much goes in and out. By way of an example, if you have budgeted $400 for groceries when you deduct $60 to spend in Costco, write this information on the envelope to keep track of spending. You could even include the receipt, later you can analyse the spending to see if there was unnecessary discretionary spending.
Budgets should be fun
“All work and no play makes Jack a dull boy”. It’s important that budgets do not consume us and we allocated sufficient budget amounts for entertainment or hobbies. Always ensure that entertainment or hobbies have a place within your budget.
The traditional ‘envelop budgeting system’ is far more effective than modern budgeting tools offered today by financial gurus. After all, it deals with real money rather than digits.