The envelope system is a simple, classic system for managing your monthly budget. It works by allocating a set amount of cash at the beginning of the month into a series of envelopes. The envelopes are earmarked for your assorted expense categories like gas, entertainment, and utilities. For that month, you’re limited in how much you can spend in each category by how much you’ve allocated to the envelope, and no more.
So who is the envelope system for? Let’s explore some of the biggest ups and downs of this simple budgeting system.
In such an inflexible system, even small changes in the cost of your monthly expenses can cause problems. If the price of gas fluctuates halfway through the month, which is not an uncommon occurrence, you may find that the money set aside in the gas envelope runs out before the end of the month. If this happens with multiple envelopes in the same month, it can destabilize the entire system and cause cash to be swapped between envelopes.
This is the key feature of the envelope system: it’s a simple and concrete way of budgeting your money. This can be very attractive to those of us who have trouble visualizing how and where our money goes each month. Planning out your monthly expenses by assigning funds to specific envelopes means that you need to understand your finances and create a working budget.
This disadvantage of the envelope system is the opposite of the last downside. Because of its rigidity, you don’t always have the ability to take advantage of sales and bargains under the envelope system. Even outside of sales, some items can vary wildly in price based off of the time of the year. For example, airplane tickets, electricity and fresh produce can all change dramatically in price based on what month it is.
For those of us who are ruled by our spur of the moment decisions, the envelope system is a great way of curbing your impulse purchases. In the envelope system, if you run out of money midway through the month, you can’t spend money from another envelope on that category unless you are willing to sacrifice. It puts a hard limit on your spending, ensuring that you don’t overspend in the heat of the moment.
This is an issue that can crop up because you’ll have less cash in the bank than you normally would. Instead of swiping their debit card in a pinch, some people begin to use their credit cards more frequently. You should never resort to using credit cards while using the envelope system. The interest and possible late fees from credit card usage will always outweigh and possibly negate any financial gains you could realize from using the envelope system.
Ultimately, the envelope system is about knowing yourself and your limitations. If you have difficulty with the budget system you’re using right now, or never seem to be able to keep on track with your finances for more than a week or two, the envelope system could be a powerful tool. It clearly defines what money should go where, and ensures that you don’t spend more in any given category then you budget for.
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