I recently stumble upon a really simple but effective budgeting system. I'm sure some of you are already practicing a similar system. It's called the Envelope System. The idea is very simple. You just need to divide your budget into categories and store the cash allocated in their individual envelopes. Once the envelope for a category is empty, you can't spend anymore until the next time you fill it up.
Here's are a few steps highlighted by Dave Ramsey to help start budgeting with the Envelope System.
- Budget each paycheck. Budget is a dirty word to most people, but you must budget down to the last dime if you're going to successfully implement the envelope system.
- Divide and conquer. Of course, there will be budget items that you cannot include in your envelope system, like bills paid by check or automatic withdraw. However, you can create categories like food, gas, clothing and entertainment.
- Fill 'er Up. After you've categorized your cash expenses, fill each envelope with the money allotted for it in your budget. For example, if you allow $100 for clothing, put $100 in cash in your clothing envelope for the month.
- When it's gone, it's gone. Once you've spent all the money in a given envelope, you're done spending for that category. If you go on a shopping spree and spend the $100 in your clothing envelope, you can't spend any more on clothes until you budget for that category again. That means no visits to the ATM to withdraw more money!
- Don't be tempted. While debit cards can't get you directly into debt, if used carelessly, they can cause you to over-spend. There's something psychological about spending cash that hurts more than swiping a piece of plastic. If spending cash whenever possible can become a habit, you'll be less likely to over-spend or buy on impulse.
- Give it time. It will take a few months to perfect your envelope system. Don't give up after a month or two if it's not clicking. You'll get the hang of it and see how beneficial the envelope system is as you dump debt, build wealth, and achieve financial peace! See ... simple!
Credits: Dave Ramsey
Of course, you don't have to really use actual envelopes to implement your budget. You could maintain a spreadsheet, a log or if you are savvy enough, download and run Bucketwise. Start budgeting today to achieve your financial goals!