It’s a new year and perhaps you are looking for new ways to budget and save. The envelope system has, for some, been an effective way of managing a budget and sticking to it because it draws from the principle that you spend less when you see exactly what you are spending, as opposed to swiping away without regard for what your budget prescribes.
What is it?
The envelope system became popular when financial guru Dave Ramsey recommended using it as a method of managing budgets. The system is as simple as it seems: when you receive your salary, first determine your discretionary budget. This is what is left after you’ve paid all your bills and settled some of your debt.
When this is done, draw up a budget according to different categories: groceries, petrol, household items, clothing, entertainment, gifts, and money for fun, for example. Now you withdraw cash and sort it into envelopes labeled for these different purposes, according to your budget.
For example, you’ll have an envelope for groceries, and only use money from said envelope when you go grocery shopping, and another one for petrol money, which will only be used for that purpose. When the money in an envelope has run out, it is finished, and you are not allowed to take money from other envelopes to supplement others.
Alternatively, divide your budget according to the days of the month until your next salary is paid. Number envelopes from 1 to 31 and place an equal amount of cash into each envelope. You are not allowed to spend more money than is allocated per day. Whenever you have some money left, put it in the next day’s envelope. Seeing how far you can stretch your daily budget is a fun challenge.
Pros of the envelope system
1. The tangible nature of the envelope system means that you take responsibility for your budget and spending habits and learn to be more disciplined with your cold, hard-earned cash because you can see it being spent. You know the uncomfortable feeling you get in a movie when you see heaps of cash being blown away like leaves in the wind? Seeing that literally happen with your own money and being left with nothing but an empty envelope to show is infinitely more uncomfortable.
2. If you’re using cash, every cent is important. When you go to a store with the intention of spending only R100, swiping for R101 is easy and it doesn’t feel like you’re not sticking to your budget. But a rand here and there adds up. If you only have R100 in cash, you can’t spend one cent more.
3. Planning is an essential part of the envelope system. You need to know in advance how much cash has been allocated to each envelope. If you have financial problems, planning ahead is motivational.
4. If you have kids, the envelope system is a great tool to teach them about budgeting. Ask them to help you divide the money into the envelopes. When kids see actual money and the way you plan how it’s going to be used, they’ll learn the responsibilities that come with money. Better yet, why not have them do the same with their pocket money?
5. Remember how Mary Poppins turned doing chores into a game? This approach helps adults too: mundane tasks are easier to do when they’re turned into a game. When you see the money in your envelopes running out, it’s difficult not to challenge yourself.
Cons of the envelope system
From the get-go, this system takes planning, which isn’t everyone’s cup of tea. Also, going shopping might just get a little more complicated.
Say you’re going to a grocery store, you might have to use at least three different envelopes at any given time: one for groceries, another for clothing and another for home décor – perhaps all at the same store.
Some people think that adhering to the strict rules the envelope system proposes might take away from the spontaneity of spending when it comes to price changes, like sales or promotions, which will undeniably play a part in the current economic climate, making it especially difficult to stick to your budget.
Ultimately, the system you use for managing your budget always boils down to taking responsibility for your spending, which does require having knowledge of how much you spend on what.
At the end of the month, take a hard look at your spending for January and decide how you can go about it in a more responsible manner. The year is but a seedling – make the most of your cash tree in the coming months.
Have you tried the envelope system? Tell us about your experience in the comments section below.