When making a budget, most people find that they need a structured method in order to help them stick to it. While there are many different budgeting methods out there, one of the most popular is the envelope method.
The idea behind the envelope method is simple: you place cash into separate envelopes, each of which is assigned a particular expense for a determined time period. Monthly periods are common since major bills and expenses are usually due every month. Once the money is placed into an envelope, it can only be spent for the particular purpose assigned to that envelope, and money cannot be taken out or added.
Why Does it Work?
The main reason why the envelope method works is it’s so tangible. It suddenly becomes a lot more difficult to splurge on sudden and spontaneous expenses if you see that the money has already been set aside for a particular purpose. The idea that you’re not allowed to juggle the money around, no matter the reason, also causes people to hesitate on spending money on unnecessary expenses due to the possibility of becoming short for more critical expenses.
Who Does This Method Work For?
People who are prone to splurges or do not take the effort to track their expenses can benefit from this method. It also works great for those who regularly forget to pay bills or miss payment deadlines because you can write down due dates on the envelopes, especially for recurring expenses with specific payment dates such as rent or mortgages.
This method also works great for people who are unable to set aside a particular amount for regular bills that may have varying amounts per month. If you have a credit card, for example, the bill might be due on the same day per month but the amount may differ. You can use the envelope method to try and gauge how much your next bill would be through two methods. You can either gather all your receipts for the month and calculate the exact total or you can see the statements for the past few months and get the average.
Who Might Not Benefit from This Method?
The envelope method is not for everyone. First, it requires that you carry cash with you at all times, and not everyone is comfortable carrying envelopes filled with cash around. Second, if there are no ATMs close to where you live, it can be difficult to get cash to refill the envelopes as needed. This means that you would need to withdraw the bulk of your cash at one time. Third, people who don’t have a fixed income might find it difficult to cope with the envelope method because they don’t have a stable paycheck every month to portion out. Finally, using the envelope system means that you won’t be eligible for any rewards or point systems in many businesses, such as your bank and many supermarkets.
Tips on Getting Used to the Envelope Method
If you’re having trouble using the envelope method, here are some tips that you can use:
· Use an Accordion Folder if You have a LOT of Bills/Expenses
If you have a lot of bills to pay for, it might not be a good idea to carry around a bunch of envelopes. What’s more, you would need to keep on purchasing envelopes! Even if you know where to buy envelopes online for a cheaper price, it’s still a hassle to keep track of separate envelopes over and over. An accordion folder might be a better choice if you don’t want to handle multiple envelopes.
· Identify “Rare” Expenses and Do Away with Them
You probably don’t purchase clothes, bags, or shoes on a monthly basis, so it wouldn’t make sense to set aside an envelope for these particular purchases. You can just lump these expenses in with another envelope – household expenses, for example – and if the money does not get used, you can roll it over to the next month. Just make a small note on the envelope face so that you know where the extra money is going to be used.
· Pay off Debts Immediately
If you’re lucky, you might have some extra money in your envelopes after you pay your bills. You might be tempted to go out and get a small reward for yourself; there’s nothing wrong with that! However, a smarter choice might be to use that extra money to pay off any outstanding debts that you have.
· Take Your Time
It can be difficult to find the right budget that you can use with your envelope method. You need to take your time to find the budget that you can work with and be comfortable using for a long time.
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