There is nothing new about the envelope budget system, your great grandma knew it well. It has been around a very long time. This was very popular since many banks gave out envelopes for making deposits with a ledger already printed to the envelope the envelopes were often free and also because many people did not trust banks as much as people seem to today. Our great and grand parents liked to keep as much cash as possible, as good a practice now as it was then. During the Great Depression, a result of bank funny business, people began to hoard as much cash as they could and take very great care as to how much of it they spent. In fact the word “cash” comes from the word “cache” which means a collection or large pile of something. Operating on a cash basis helps to fight inflation and helps you to keep on budget. When money is gone from an envelope, you stop spending it’s as simple as that. You don’t spend money you don’t have, which involves credit. Here is how it worked and the advantages for you and society.
First thing you need to do is take an assessment of your income each pay period. Determine a bottom baseline you know you can count on, any fluctuation in your income should be above this amount. For example let’s say you know for a fact that your take home income each pay period fluctuates between $2k and $2.2k So it might be more but it never goes below $2k unless something weird happens. So then set your baseline income for your budget at $2,000. Next set some percentage goals for each expense category that you have. Only you can ultimately set these goals but here is a quick guide:
- Housing – 25-30% (including mortgage)
- Utilities – 5-10%
- Food – 10-20%
- Transportation – 15-20% (5-10% /no car payments)
- Clothing 3-5%
- Medical – 3%
- Discretionary – 5-10%
- Savings – 10-15%
- Debt – 0-10% (besides mortgage)
Hopefully these numbers give you a good starting point and some idea of where you should be at. They are not written in stone so adjust them to fit your situation but remember they are goals so maximize the good (savings) and get the bad as low as you can (debt, medical, utilities, etc.) Now that you have your goals in mind figure out the dollar amount those goals come out to as a percentage of your income. Plug those figures in to each category so you know how much each percentage is in actual dollar amounts. Now you know how much money to put in each of your envelopes each pay period. Some things may never go into an envelope especially if they are automatically debited, but you have made the allocation nonetheless. This will keep you on track to spending only what is needed and allocated and not lose track of where your money is going. In hard times this is an essential survival tool that our great grandparents used during the depression to keep their families afloat. During good times your debts can be eliminated ASAP and your savings expanded much more efficiently.
Important tip: Never violate the allocation of an envelope unless you have an emergency of a very serious nature. It is often tempting to go into an envelope that has money in it for clothing to pay for a night out, but don’t give in to that temptation. Keep discretionary for those sorts of things and keep money allocated in the envelope for it’s designated purpose. When an envelope is empty, you stop spending in that category. No cheating yourself. Stick to it and you will be far better off.
If you don’t have a budget do it today.