Need a Financial Wake Up Call? Go Old School
You may be familiar with a budgeting technique known simply as the envelope system. The idea of the method is to create and label envelopes to represent the different categories of your spending — entertainment, food, clothing, etc. Once that is completed you can allocate a weekly or monthly budget for each category and put that amount of cash in each envelope.
Why cash? Often the problem with using credit or debit cards is that you don’t feel the full effects of spending money until you check your balance (or in some cases don’t check your balance and get hit with overdraft fees). On the other hand breaking a bill, getting change, and seeing the physical money in your envelope dwindle can really open your eyes to how much you actually spend. This is why, while many personal finance apps can essentially mimic this idea of breaking down your spending into categories, the envelope system has remained an effective tactic for those needing to get their finances in order in a hurry.
Another way this method will help your spending is that it will make you think about the purchases you’re going to make before you make them. For example, prior to leaving the house, you’ll need to grab the cash from the correct envelopes to bring along with you. This will force you to stay within your set budget and prevent any impulse buying you might be tempted to do.
Just like those fancy apps there are many ways to customize the envelope system to your needs. While some might consider eating out “entertainment” others might factor these meals into their “food” budget. And still others might just create a separate “eating out” envelope if it’s something they consider to be important. It doesn’t matter what you call your budget as long as you stick to it.
One important note regarding the creation of your envelope budget is to not only consider your spending but also think about your savings. Don’t forget to put money aside for emergency funds, rainy day funds, and other savings while calculating how much you can allocate to each category. Ideally you should be saving at least 20% of what you make while no more than 50% goes to essentials, leaving 30% for your envelopes.
Today personal finance can be very high-tech. However for some people the best way to get their finances back in order is to get a little old fashioned. If you’re having trouble sticking to a budget and want to change, the old school envelopes system might just be right for you.