Money for Life Applied Principle #9 – Learn the Secret of Envelope Budgeting
Envelope Budgeting is a simple, yet very effective method of spending management. There are 4 basic principles of envelope budgeting, and in my last post we covered the first principle, which is setting money aside in advance. The second principle is “spend from how much is left.”
“One of the significant secrets to not overspending is to know daily how much you have left to spend in any area of defined spending. While this seems very simple and even obvious, consider how often you make purchases without knowing how much you can really spend before your spending outstrips your available resources—or how many times you buy something without knowing how it will negatively impact your ability to meet other spending requirements.”
Let’s say for example your spouse makes a purchase that’s he or she wants to be a surprise for the family. This purchase could negatively impact your other areas of spending if you have not first set aside money for this surprise, or if this purchase takes the envelope into the negative. Spending more in one area of spending than is available, takes money away from other areas where you thought you had money available to spend.
“When people used the traditional envelope system to make purchases—to buy clothes, for example— they would take the clothing envelope with them. They knew immediately how much they had left to spend and how long it had to last before they funded the envelope again. This information was invaluable in assisting them to make sound spending decisions. If you choose to spend less than you make, then spending from what’s left becomes very simple. If there is not enough in the envelope to complete the purchase being considered, the purchase is delayed or another purchase decision is made. Without knowing how much is left, you can only hope that the purchase decision you are making will not negatively impact other areas of your financial life. Unfortunately, you will not know this until it is too late. Knowing in advance how much is left to spend is the secret to making smart spending decisions every day.”
Contains excerpts from Applied Principle 9, Money for Life, by Steven B Smith