How to Use the Envelope Method to Control Personal Spending
Household budgets are based on income (revenue) and out-go (expenditure). If you find
your out-go is out of control, consider using the envelope method for personal budgeting
to get your daily and weekly spending under control. You’ll pay your bills first, and then
balance your budget for personal expenditures.
Set an Allowance
Start by adding up your monthly bills such as the mortgage, utilities, insurance, credit
card payments and car payments. Add an additional 10 percent to that amount. Deduct
the amount (bills plus 10 percent) from your monthly income amount. The remaining
amount will be your “allowance.”
The allowance covers ongoing expenses such as gas and groceries, as well as smaller
expenses such as snacks from the vending machine at work.
Review your expenses covered by your allowance and categorize each one. Determine
how much you spend on each item. For example, you may spend $5 a day on lunches
during the week and $150 a week on groceries. Include all your expenses, such as
money spent for magazines, clothes, drinks with friends.
You’re likely to find that your new allowance isn’t going to cover your personal expenses
-the expenses to which you’ve become accustomed.
Organize the Envelope System
The envelope method forces you to control your day-to-day and week-to-week spending
by allowing you to only use the cash available to you in each category.
Lay out as many envelopes as you have categories and mark each envelope with one
category. For example, mark one envelope “Lunches at Work.” Mark another one “Gas,”
and so on, until you have an envelope for each category you developed when reviewing
your spending habits.
Prioritize your expenditures so that the necessities, such as gasoline for your car and
groceries, are sufficiently funded. Place the appropriate amount of cash needed in each
envelope starting with the highest priority.
Remember, you’re bills are covered by the money in the bank. When depositing your
check, take the remainder -the allowance- in cash to fund your envelopes.
For example, if you spend $150 a week on groceries, and you get paid monthly, place
$600 in the envelope marked groceries. Continue this process, meeting the higher
priority needs first, until you run out of money. You may find there is little if any left for
non-essential items such as fresh flowers from the florist or the $20 a month you spend
on magazines.
If no money is left for these, those expenditures go unfunded. This is where you cut
your costs.
Use the System
Line up your envelopes, even the empty ones, in a shoe box or similar container,
arranging them up according to priority with the highest priority in the front. Keep the
box in a safe place.
Your personal needs are now categorized, prioritized and funded. You cannot use
your debit card or credit card for any of these expenses. The money remaining in your
account is for monthly bills and is now off limits. You can only use the money in the
envelopes.
Each day, take only the amount you need in cash from the appropriate envelope. If you
need gas in the car, take the money from the envelope marked, “Gas.” Do not borrow
from another envelope or put any items on a credit card. Use only the cash available to
you.
Reap the Rewards
Using the envelope method raises your awareness of how you spend money. Continue
to use the method, adjusting the amounts as you become more thrifty and savvy in
your spending habits. If you are now so inclined, fund your “empty envelopes” with the
occasional dollar or two saved through frugal spending until you have enough to treat
yourself.
Remember the extra 10 percent you kept in your account each month? That adds up.
You are now not only meeting your monthly obligations, you’re starting to save money
as well.
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http://www.stewardship.com/articles/the-envelope-system-explained
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