Envelope Budgeting is a simple, yet effective method of spending management. There are 4 basic principles of envelope budgeting, and the first is “set money aside in advance.” Setting money aside in advance of spending requirements, is one of the keys to making envelope budgeting work.
“When you commit yourself to the use of the envelope system, you become dedicated to living within your means. One of the primary reasons for this is that the envelope system requires you to set aside money in advance for each of the spending requirements you have, including monthly required and discretionary and periodic required and discretionary expenses.”
In today’s economy many families are living paycheck to paycheck. This can make it a bit challenging to fund each envelope at the appropriate time to match up with spending requirements, but it is possible. By focusing on living within your envelopes balances as you fund the envelopes each pay period, you should also be able to set aside some extra toward your “30-day funding” goal.
“One of the significant problems people face today is not understanding how future spending requirements will impact their monthly cash flow. Have you ever had an annual insurance payment surprise you? Other periodic spending requirements include vacations, property tax payments, holiday spending, gifts, auto registration fees, auto maintenance fees, house maintenance fees, furniture and appliance replacement costs, and so on. As you think about it, there are many things that can catch you off guard if you don’t plan ahead.” These types of expenses can be a constant challenge for people who are unprepared for periodic spending requirements. Using the principles of envelope budgeting, however, will help you to set aside money in advance for periodic spending and keep you from incurring any new debt.
“Most people manage spending by their checking or savings account balance at the bank. Unfortunately, this account balance does not prepare you for the periodic spending needs that will arise in the coming months. It also does not alert you to the spending your partner is planning over the next few days or weeks. So you make independent decisions about how much you think you can spend without really understanding the big picture. This is a very dangerous approach and leads to problems, including bounced checks, frustration, and, ultimately, more debt. Most of the overspending in families can be traced to an inability to incorporate periodic spending requirements into their current cash resources and spending practices. A great example of this is the amount of credit card debt that is created during the holidays or on vacations each year as a result of not having money set aside in advance. Many justify this spending by telling themselves that they will pay the credit card balance next month. This rarely happens, because next month’s spending requirements are already based on 100 percent of the cash resources for that month.”
“The envelope system addresses this problem of periodic spending requirements by allowing you to set aside money in advance of periodic spending needs. For example, if you were going to spend $2,400 on Christmas each year, you would be setting aside $200 each month. To state this another way, if you want to spend $2,400 each year for Christmas, you need to spend $200 less on other things each month.”
“Perhaps your parents or grandparents used an envelope budgeting system. Imagine how they felt each December when they prepared to purchase gifts for Christmas and the Christmas envelope was full! Imagine how you will feel when you want to take a vacation and know that the money is already set aside in advance. Or imagine how nice it will feel to know that you have money set aside to replace the tires on your car the next time it’s required. The envelope system holds the secret to setting aside money in advance.”
Contains excerpts from Applied Principle 9, Money for Life, by Steven B Smith