Using Envelope Systems to Budget
In a time of e-filing, endless ATM slips, and more Americans in debt than ever before, it may be nice to know that there's a budgeting solution that's as effective as it is easy. Envelope systems may be old-fashioned, but they're still highly effective at helping people stick to a budget and lick their financial problems once and for all. With envelope systems, you don't have to worry about budgeting every purchase or keeping track of all expenditures.
The concept behind envelope budgeting systems is surprisingly simple. You divide your income (net, not gross) into different categories, such as "mortgage/rent," "food," "entertainment," "short term savings," "long term savings," and so on. Then, you take the money after each paycheck and divide it among the envelopes.
Choosing Categories for Your System and Allocating Funds
Your rent or mortgage will likely get the biggest chunk, followed by bills, food, gas, and other necessities. The next tier should include savings, investments, and retirement envelopes. The final tier (and the one receiving the smallest amounts of money) should be entertainment and incidentals.
Then, whenever you spend money, be sure to pull it from the appropriate envelope. If you run out of money in your entertainment envelope, guess what? No more unnecessary expenses (like movies and dinners out) until the next paycheck. This system makes sure that all the things you can't live without--like rent--and shouldn't live without--like setting aside money for retirement--get priority. On the other hand, if you've got money left over, you can roll it over into the envelope and add it to the next month's funds, create a separate envelope for semi long-term savings goals like a fun vacation, or if you're really good, to be invested.
Fortunately, there are plenty of software programs on the market that can do all the appropriating for you. This makes the whole system easier, less prone to human error (or simple willfulness!), and trackable. The best part? After figuring out workable amounts for each envelope initially, you don't have to record all your spending or constantly "budget." The work is done for you, and yet you still know where all your money is going.
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