Personal Budgeting: The Benefits of the Envelope System

Many people find personal budgeting overwhelming and complicated. A budget doesn't have to mean deprivation and it is an important piece in every individuals financial picture. For some, it can be difficult to stick to a budget, the envelope system can be an excellent tool for those who find budgeting difficult and complicated. The envelope system can be easily modified at any time to fit your budget better when life changes and your expenses do too.

Definition of the Envelope System

The envelope system is a series of envelopes that are labeled and contain a specified amount of cash. You must first write out your monthly or weekly budget, and determine how much you need for each expense. You will then add the allotted amount of cash to the envelope and strictly use the envelopes, no debit or credit cards. When the envelope is empty, then you have to stop spending. Envelopes can be labeled and used for food, rent, gas, entertainment and any other expense.

Benefits of the Envelope System

The envelope system can be great for some, and can really create control over their spending. If you are disciplined, then when your envelopes are empty, you stop spending. This forces you to stick with the allotted budget. Also, using cash prevents unexpected credit card debt. Using strictly cash makes you spend less. For example, if you are grocery shopping and only have fifty dollars to spend in your envelope, you will likely pass on the splurges and impulse buys. If you were using your debit card, it would be easy to go over budget and add on a few extra things. But no one wants to come up short at the register and have to put things back, so you will keep spending in line.

Disadvantages of the Envelope System

The envelope system may not be for everyone. If you are uncomfortable carrying around cash, it may not work. There is risk to having cash only, there could be loss or theft. Also, you have no records of transactions except receipts. If you like having debit or credit card records of purchases this could be a disadvantage. Perhaps you purchase items as business expenses and want to have a credit card bill to prove it at tax time. Also, if your expenses fluctuate, the envelope system may not work. If one week you do not drive at all, but the following you drive hundreds of miles for a business trip, then you may not have enough gas money allotted that week. And lastly, the envelope system will not work if you pad it with your debit card. The point is, when you run out of cash, you are done spending. Some are not disciplined enough, and would whip out the credit card to cover the difference, which defeats the purpose of the envelope system.

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