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The Envelope System for Budgeting

Household Finance

The Envelope System for Budgeting

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Have you ever tried the envelope system for budgeting? It’s such an easy and common-sense way of managing money that you can’t really go wrong. In fact, my Mom still uses the envelope system. After so many years and so many advances with electronic banking, bank cards, apps, etc. She still trusts the envelope system for budgeting more than any other.

So, what is the envelope system for budgeting?

Imagine receiving your salary in cash and then dividing it up into spending categories. So perhaps R3,000 for groceries, R1,500 for clothing, etc. You place the money in envelopes (or bank bags) and work out how you can make it through the month. Hopefully, there’s some leftover that you can then save or invest.

Now firstly, we don’t receive our salary as cash, but you could withdraw a set amount each month and then divide it between envelopes.

The idea of the envelope system is that you use cash, and you use the money from the appropriate envelope when you shop. As you’re working with cash, you can always see how much you have left. And when it’s all gone, it’s done. You either need to stop spending that category, or you need to move money from another envelope.

The envelope system for budgeting is a practical, visual, and tactile way of budgeting and tracking expenses.

How do you start using the envelope system?

The easiest way to start using the envelope system is to find one category where you know that you often over-spend. Perhaps it’s eating out, maybe it’s clothing, or perhaps it’s snacks in that terribly tempting aisle at the cashiers. Whatever it is, set a budget, draw the cash, and try to make it through the month with only that money.

If you see that it works well for you, you could expand the concept to a second, or third category.

A more modern hybrid envelope system for budgeting

So the envelope system for budgeting works well for things that you can spend cash on. But, you can’t necessarily pay your rent with cash. Perhaps you can, but is it worth the effort and expense of drawing money? The same goes for car instalments, debt payments, data, etc. Some things are just easier done electronically!

That’s where the “hybrid” system comes in. I’d say just identify the areas that you need to do electronic payments, and the areas where cash works well. Maybe you’re good at managing your card limit for swiping, or perhaps you are able to track your expenses so that you know what you’re spending.

Managing your money is all about finding what works best for you, and your specific circumstances. We really do all have different financial situations in terms of what we earn, how regularly, how it is paid to us, as well as where and how we spend our money.

Find what works best for you, but importantly, create a “system” for yourself.

Our spending is generally the same each month. Think about the amount you pay for rent, data, cosmetics, clothing, groceries, etc. If you average it out over the past months you’ll find the pattern and understand what you spend. The trick is now to try make your spending habits more predictable. Whether this is by using cash and the envelope system for some categories, using recurring transfers to move money between accounts, or doing set transactions on specific days.

Using a budgeting app

I really love using a budgeting app. Some people (my partner really) think that I’m too obsessed with my budget and tracking my expenses. But I really don’t think so and I absolutely don’t need to justify my actions in this regard.

I use a paid-for app called YNAB (which stands for You Need a Budget), but there are free ones too, like the local 22 Seven app.

See these two related posts for more on the budgeting apps:

The advantage of using a budgeting app is that it is easy to set your budget, track your expenses, and quickly see how much you have left. The categories in my budgeting app are simply “electronic envelopes” for my budget and I use the same principles as the envelope system. If the money in my Grocery budget is depleted, I either need to stop spending, or I need to move money from somewhere else. The simple truth is that I can’t have it all. I have a set salary and I need to make it work each month. (See this post on counting your money…)

Cash is King

There’s a saying that “Cash is King” and the reason is that cash is physical money that you have. You may have access to R20k on your credit card, and you can use it immediately, but it is not your money. You will have to pay it back in the months to come, and that may come at a sacrifice to other opportunities or things that you want. If you have the cash it really means that you have the money and that you can afford it.

I have some relatively wealthy friends who do almost all their day-to-day transactions using cash. They have credit cards and access to all sorts of banking products, but they prefer to withdraw a set amount of cash at the beginning of the month and they live off that.

As mentioned earlier, you need to find what works for you. You need to create systems and habits that support your strengths and weaknesses when it comes to finances and admin. Do what’s right for you.

Will using the envelope system really help with your finances?

I’d say definitely! Of course, it depends if you stick to the rules and work with only money that you actually have. It wouldn’t help to withdraw cash from your credit card when you don’t actually have the money in the bank to back it.

I have used the envelope system for budgeting at various stages in life. I find it a quick and easy way to get back on track. Once you have your spending and budget under control you can always stat using other apps or systems to manage your money, but this will really help you to take charge of your money!

Article reposted with permission from Take charge of your money.



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My name is Brendan and I’m a software developer working a regular 9 – 5 job. I’m 40-something years old, married and living in Cape Town (South Africa). I often wish that I didn’t need to “slave away” at my job as there is so much that I would love to be doing! Life is short and I want to make the best of it and hence I am forever working towards a goal of financial freedom and the idea for my blog is to create a collection of thoughts, ideas, tools, useful videos etc that are helpful to me, and hopefully to you too!

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