How To Start The Envelope System At Home

Thanks! Share it with your friends!

Close

How To Start The Envelope System At Home

By Kevin Farrar

The use of checks, credit cards and debit cards has proved a convenient way to purchase. In addition to that if we have our paycheck set up on direct deposit it is possible to live for months without touching cash. One of the problems with cash-less living is that unless we are extremely disciplined we expand the boundaries of our spending. In fact it causes many people to spend well beyond what they can afford.

It has been estimated that we will overspend by 15% or more when we don’t use cash to pay for purchases. Just imagine what you could do with 15% of your annual household income. Wouldn’t it be worth trying something different just to find out if it works?

Only a small percentage of families have a system in place to help control the household finances. One of the best budgeting systems ever perfected is the envelope system for managing money. It’s a very simple and effective way to control spending.

It’s easy to set up the envelope system. It involves setting up a system of envelopes to allocate money for your household expenses. Once your pay check has been deposited you withdrawal cash equal to the amount of what you have planned to spend for that period on each category of expenses. Then when it is time to put gas in the car, go to the store or pay a bill you take the money out of the appropriate envelope to cover that expense.

1. Decide what categories of spending you are going to put on a cash basis. Some people prefer to put all of their expenses on a cash basis. If the bills are being paid on time and there is no financial crisis present then it’s not totally necessary to do it that way. It’s up to you. We normally don’t over spend on fixed expenses like the car payment and house payment. Those types of expenses are controlled by a fixed amount that occurs month after month. So the areas we need to control most are variable expenses like food and entertainment. At the very least the categories I recommend putting on a cash basis are food, clothing, gasoline and spending money. Other good candidates for the envelope system are auto repairs, toiletries, cosmetics, and hair care. Review your individual spending habits to determine what is best for you. One guideline is, if you don’t know how much you are spending in a certain area you should put that item on a cash basis for a while.

2. Get several standard letter size envelopes. On each envelope write the name of one of the expenses you are putting on a cash basis. You create a separate envelope for each expense. For example you might have five different envelopes labeled Food – Gasoline – Water – Electric – Spending Money.

3. Once your envelopes are labeled decide how much you plan to spend on each expense for that period. Then go back through and write those amounts on their corresponding envelopes. If you are not sure how much you usually spend on certain expenses guess at the amount then make adjustments as you become more aware of the amount you’re spending. It may help to carry a small notebook with you for a month or so to record every cent you spend.

4. Now put your envelopes in some type of container. A small shoebox will work. What works best is a coupon size expandable file or coupon organizer that can be purchased for a few dollars at your local discount store or office supply. Label the tabs in your organizer to match the labels on your envelopes then put your envelopes in the file under the corresponding tab.

5. When you get paid supply your envelope system with cash. Add up the amount needed to fund your entire envelope system for that period. Withdraw that amount of cash from your bank account then distribute the money among your envelopes according to the amount written on the front of each envelope. When it comes time to spend for a cash expense get the money from the appropriate envelope to make the purchase or pay the bill.

Using the envelope system helps us take control of our money through increased awareness and built in discipline. When we spend cash we know when we’re getting low. If we leave the plastic at home and take a twenty-dollar bill chances are slim that we will be able to spend more than $20.00. Through awareness and built in reduction of impulse spending we start to realize savings. Real money that we can put in the bank, invest, or use to reduce debt.

Being successful at handling money takes planning. The envelope system is extremely powerful but it is only part of a good financial plan. To effectively manage your personal finances you should also include a monthly budget, spending plan, savings plan and debt reduction plan.

“Suppose one of you wants to build a tower. Will he not first sit down and estimate the cost to see if he has enough money to complete it?” (Luke 14:28)

Kevin Farrar is the author of Wisdom For Your Wallet. A comprehensive personal financial study covering everything from the basics of money management to dealing with a financial crisis. To access his life changing program go to http://www.wisdomforyourwallet.com.

Article Source: http://EzineArticles.com/?expert=Kevin_Farrar

Comments

Write a comment

*

*