Tuesday, August 19, 2008

Budgeting system #1 - the envelope system

If you are spending more than you want to be, then you need a budget.  If your debt and spending are out of control and you need to take drastic action, the envelope system might be the right system for you.

The envelope system works wonders to bring spending under control.  Better yet, it does so without requiring tedious recording of all of your purchases.  You don't need any special software, books or anything else.  All you need are a few envelopes.

The first step is to figure out how much money you have coming in every week.  Then, take some time to list out the different categories that you regularly spend money on.  You will probably need categories for: transportation, groceries, utilities, entertainment, dining out, saving, rent or mortgage, debt reduction, clothing, and gifts.  Include a category for anything else that you spend money on.

Next, figure out how much money you have every week to allocate between these categories.  Then determine how much to put in each category.  Write the name of each category, and the weekly amount, on the front of an otherwise blank empty envelope.

At the beginning of each week, pull out enough cash from your bank account to fill each envelope with the alloted amount.  Then, spend nothing but what you have put into the envelopes.  In order to make this work, you need to do all of your spending in cash.  Bills, of course, can not be paid in cash, but everything else comes out of those envelopes.  If you have extra left over from one week, that's great - let it keep building.  If you run out too soon, you need to make changes in your spending to make sure that it does not happen again.  If you keep consistently coming in under budget in one category and run out of money before the end of the week in another, then you might want to adjust the amounts set aside for those categories.

The great thing about this system is that it is simple to implement and absolutely guarantees that you will not spend more than you want to.

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