Budget Method #1: Envelope System
Maybe you’ve heard your grandparents talk about how they managed money in their younger years. They got paid, cashed their paychecks, and divided cash into envelopes labeled for each monthly bill: Rent, utilities, groceries, gas, clothes, and entertainment. When the cash in each envelope ran out, you were done spending in that category for until the next paycheck came.
Thanks to Dave Ramsey and other financial media darlings, this method is coming back into vogue. It’s not realistic these days to live your life in an all cash method. Mortgage companies and most landlords require the ability to automatically deduct payment from your checking account. It’s hard to pay your utility bill in cash, let alone your cellphone bill and other monthly recurring costs.
There are, however, lots of expenditures that can be paid for in cash. These purchases often fall in the discretionary spending category and might benefit from the Envelope System. For example:
- Happy Hours
- Lunches/Dinners out
- Babysitting (while you are at happy hour, for example)
One benefit of using the Envelope System and paying for non-essential stuff in cash is the CASH part. Studies show that it is harder to part with green cash than it is to hand over a credit or debit card for payment. Also, when you see your dwindling pile of cash, you are more likely to think twice about that purchase.
The whole point here is to get a handle on your spending so that you are able to save money each month for longer term goals.
Retirement, college, and home repairs all come faster than we think. The only way to be ready for these big ticket future items is to not spend every penny we make today.
“But, what about all those frequent flyer miles I earn using my credit cards?” you say in a horrified voice. Well, if you are saving enough for long term goals and still able to pay your credit cards off monthly, you might be a candidate for Budgeting Method #2 – the Save First System. Stay tuned for the next blog to learn more!