subject: The Envelope Method For Sticking To Budgets [print this page] One of the most difficult things about trying to stick to a budget is self-restraint. You might see things at the grocery store that don't fit into the budget but you really want to buy. Or you might be slightly over budget, but still really want that coffee - And give in.
Self-restraint is a muscle. Like developing any other muscle, it helps to have a structured exercise routine.
The Envelope Method is one such method. The Envelope Method is a method of creating budgets and sticking to them. Using this method, you'll learn to develop self-restraint while saving yourself money.
==> What is the Envelope Method?
The Envelope Method is a cash-based accounting system. Here's how it works.
You start by tracking your expenses for a week or two. This will give you a realistic guess at what your weekly budgets should be at.
Once you have two weeks of financial data, write out your weekly budget for the upcoming week. Break down your budget into different categories.
For example, you might have a groceries budget, a car budget, a personal budget, a food budget and a miscellaneous budget. Then based on your previous financial data, set a budget for the upcoming week for each of these budgets.
You then take out a few envelopes. On each envelope, write the name of a budget category. Go to the ATM, get some cash and put exactly the budgeted amount in each of these envelopes.
At the beginning of the week, you lock away your ATM cards and your credit cards. Anytime you spend money, you take the cash out of the envelope directly.
==> Why and How it Works
Because there's only a finite amount of money in each envelope, there's no possibility of overspending.
With cash transactions, the psychology is quite different than credit cards. You can swipe a credit card and sign a piece of paper without nearly as much psychological weight as if you had to physically hand over a $100 bill.
Dealing with cash lets you feel the weight of every transaction. You'll think more carefully before buying anything.
Also, the knowledge of a truly limited supply of cash will prevent you from buying things you don't really need.
Of course, self-discipline still plays a big role. You need to first track your expenses meticulously and keep trying your expenses throughout the process.
You also need to stick to your resolve that you won't spend more than the money in your envelopes, else you'd defeat the whole purpose of the program. Your brain has to understand that there really is a limited supply of money and that when it runs out, it's gone.
After all, that is the financial truth. We can hide that from ourselves with credit cards and clever banking, but at the end of the day, if we spend more money than we can really handle, we'll pay for it in the future.
Using the envelope method, you'll be able to keep your spending under wraps. You'll be able to develop self-restraint in a very natural manner, using your brain's natural understanding of scarcity. It works - It's worked for thousands of people and it can work for you too.
