Envelope Budgeting is a very simple, yet effective method of spending management. There are 4 basic principles of envelope budgeting. In my last post we covered the second principle, which is spending from how much is left. The third principle is “when you run out, you must make a choice.”
It’s fairly simple, really. When you run out of money in one envelope, you must make a choice about what to do.
“We all want to be fully empowered to make choices. Often, this is one of the justifications we make for spending money. “It’s my money, I’ve earned it, and I have the right to decide how to spend it! If I want to purchase that coat, I will, period.” The problem with this thinking is that it often takes choices away later on: because you purchased that coat, you may not be able to purchase the birthday gift you wanted for your daughter.”
Many people think of budgets as restricting, but in reality a spending plan is empowering and gives you the confidence to make informed spending choices. Part of that confidence is understanding the consequences of the choices that you make.
“The envelope system does not eliminate the ability to make personal choices; it provides information so you can make more informed decisions. With the envelope system, it is quite possible to run out of money before you fund the envelope the next time. If this happens, you have three options: (1) put off the purchase until you fund the envelope the next time, (2) purchase something less expensive, or (3) purchase the item and transfer money from another envelope to cover the cost. All three choices will still allow you to live within your means. With the third option, you can determine at the point of purchase which other area of spending you would like to impact. For example, if you wanted to purchase the coat and didn’t have enough money in the clothing envelope to cover the cost, you could transfer money from your groceries envelope to cover the cost. If you made this decision, you would do it with the knowledge that you would not be able to spend as much on food this month. There’s nothing wrong with having made this choice. Perhaps you know that your grocery needs were less this month than in the past, or perhaps you did not spend all the money in your grocery envelope last month and you have extra. Whatever your thinking, you have to be able to make a purchase decision and understand exactly what impact it will have in other areas of your financial life. Making a purchase choice is great as long as you do it on an informed basis. The envelope system holds the secret to truly empowered purchase decision making.”
Contains excerpts from Applied Principle 9, Money for Life, by Steven B Smith