Building a better envelope budgeting systemWith a few refinements, this old cash-based system still worksBy Gary Foreman
Dear New Frugal You,
I've
always had a problem with the "envelope method" of budgeting. It
seems difficult to manage unless you're using the money all at once, like
spending all of your $100 food budget on one big shopping trip. What about the
mixed items? For example, suppose I go to the grocery store and buy three
apples, a newspaper, toothpaste and a dog toy. I pay with a $20 bill from the food
envelope. Those four items should come out of four envelopes -- my food, reading,
health/beauty and pet categories -- but I don't have all the envelopes with me
and it would be cumbersome to maneuver all of them at the cash register and pay
for one thing at a time from the correct envelope. The change from my $20 goes
back into the food envelope. Now I must go home and take out the right amounts
from the other three envelopes and add them to the food envelope.
How do
people really do this on a day-to-day basis and keep the categories straight?
Thanks for any advice! -- Jessie
in South Dakota
Dear Jessie,
You've
pointed out some of the biggest challenges in using the 'envelope system' for
budgeting. It was developed in a simpler, slower time and can be cumbersome to
use.
Let's
take a moment to review what the envelope system is (for those who might be
unfamiliar with it). No one knows exactly who the first person was to use an
envelope system, but it began when cash was king, before everyone had credit
and debit cards.
The idea
was that you would have an envelope for each category of your expenses. Each
payday, you'd put money into the various envelopes based on what you expected to
spend on that category until your next payday. When the money in the envelope
was gone, you had no choice but to quit spending or steal money from another
envelope. It was a quick way to keep your spending on track -- budgeting
without all the math!
The
first thing you'll want to consider is the number of categories within your
budget. Many budgets fail because they have too many categories. Remember that
a budget or envelope system is a tool to help you understand where your money
is going and what you can do to control expenses.
That
tool should help you identify problems, not bury you in needless information.
One way to avoid that problem is to have fewer categories. For most families, eight
categories will do the job.
- Taxes.
- Housing/utilities.
- Auto/transportation.
- Food.
- Medical/insurance.
- Entertainment/recreational/clothing.
- Savings/investment/charitable contributions.
- Miscellaneous.
Suppose
your reading expenses got out of hand. How would you find it? You'd begin by
noticing that your "entertainment" category seemed too high. Taking a
look at the receipts in that category you'd find that you were buying too many
books.
The key
is that you have the data available if you need it, but you're not overwhelmed
tracking it.
OK, so
now that we know what we're trying to accomplish let's figure out the best way
to do it.
To get a
cash/envelope system to work, you'll need to limit yourself to no more than eight
to 10 envelopes. Instead of moving money, try keeping a slip in each envelope.
On it, list items that were purchased from other categories with money from that
envelope. Don't worry about moving money from one envelope to another until you
get to the end of the month or the envelope runs out of money. Admittedly,
that's still cumbersome, but it's much better than moving $1.59 every time you buy a
chew toy at the grocery store.
One other
helpful trick is to select your categories based on how you shop. If you tend
to buy cleaning supplies at the grocery store, consider them to be a food
rather than a household item. Remember that the goal isn't to be perfect in
getting each item into the proper category. Rather, it's to be able to find out
where you can reduce spending.
The key
is to remember that the goal is to make it easy to control your spending and to
help you notice when something is wrong, not to collect a bunch of nice-looking
data.
See related: Living on a bare-bones budget, Trying to cut back on spending? Go BIG!
For more than 35 years, Gary Foreman has worked to help people get the most for their money. Prior to founding The Dollar Stretcher.com, he was a financial planner and purchasing manager. Gary began The Dollar Stretcher website and newsletters in April 1996. Today the website features more than 6,000 articles on different ways to live better for less. Gary has been interviewed by The Wall Street Journal, The Nightly Business Report, USA Today, Reader's Digest and other newspapers and magazines. Gary answers a question about a budgeting or saving issue from a CreditCards.com reader each week.
Send your question to The New Frugal You.
Published: June 30, 2011
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