Budgeting is an integral part of financial management. From large businesses to average households, funds need to be set aside for different types of expenses to ensure there is no overspending. There are different ways of going about it. Some prefer to create worksheets and divide the total income into several heads before the money gets credited into the account. Others use budgeting apps to monitor total income and the expenses.
While the digital budgeting means help you keep a tab on your finances, they do nothing to prevent you from overspending. In today’s world when ordering a pizza to satiate a sudden craving is as easy as tapping a few buttons on your phone, not going overboard requires ironclad mental fortitude.
This is where the old-school envelope budgeting system can help you stay in line. It is exactly how it sounds. You start by ordering cheap business envelopes and then using them to store money for different types of monthly expenses.
How Envelope Budgeting Works?
It’s pretty easy to implement. You need to first set aside the fund that goes into paying fixed monthly expenses. This includes your rent, monthly loan payments, saving fund contributions, and others.
Now, take the rest of the money out in cash and divide it into expense categories that are flexible. For example, funds for groceries, entertainment money, and cash for gas. Label each envelope for each of those expenses.
The next part is pretty easy. Take the cash out of the envelopes as and when you need. Just make sure you spend the money on the pre-allocated expense type and not anything else. For example, don’t take out money from the “gas” envelope and then spend it on drinks.
The final part is successfully staying within budget. The money you save from each head can be carried forward next month for that particular expense or can be added to a particular savings fund.
Pros of Envelope Budgeting
Reduces Impulsive Online Spending: Keeping everything in cash reduces your chances of impulsive buying online. With no access to online payment methods, you are forced to make cash transaction, which helps in reduce spending.
Unparallel Budgeting Clarity: Excel sheet and finance apps can be complicated. However, keeping funds in envelopes for different needs is as easy as it gets. Almost anyone can understand and utilize this technique.
Ensures You Have Funds for Every Expense: With money allocated for all monthly expenses, you will never miss a bill again. The only way you might miss a payment is if you end up spending a pre-allocated fund on something that you are not supposed to.
Cons of Envelope Budgeting
Withdrawing Money Becomes an Extra Chore: Most people use online payment methods to pay for stuff and they seldom need to withdraw money. With plastic cards and payment wallets being accepted everywhere, withdrawing cash from ATMs may feel like a chore.
No Online Payments: The world has gone digital. Not being able to make online payments can prove to be inconvenient. However, that very inconvenience keeps you safe from abrupt spending.