Money management is one of those things that pretty much no one is completely “comfortable” with. Even if you feel like you’re on top of things, it is all but inevitable that you will sometimes spend more in a particular budget category then you should have, that you will have less money coming in than you thought you would on a given month, or that you will have forgotten about a large annual expense – at least from time to time.
Nonetheless, when it comes to securing your well-being, and that of your nearest and dearest, being able to manage an effective budget is an invaluable skill.
In fact, it probably wouldn’t be too much of a stretch to say that is one of the most fundamental of all life skills – particularly in the modern world, where we rarely must build our own houses from scratch or farm our own food.
When you have a good budgeting system to work with things will just “fall into place” far more effectively than they otherwise would. Conversely, if you don’t have a good budgeting system, and aren’t very conscious of what’s happening with your finances, it is absolutely possible for you to find yourself dealing with unnecessary frustration and turmoil in your life, even if you have a substantial income.
There are many different budgeting systems out there today, and many different budgeting tools and apps that people use in order to keep track of their finances.
This article will sing the praises of the “envelope” budgeting method, which is a feature of some of the most popular budgeting tools out there, most notably You Need A Budget.
So, here are some reasons why this elegant budgeting system – a throwback to the kind of thing your grandmother might have done – might be a real lifesaver. It’s also a favorite here at Life in a House. My grandparents and my parents both utilized the envelope budgeting system and it is what I know and am comfortable with as well.
It will let you deal with the money you have, not the money you think you will have
The envelope budgeting system is not the kind of budgeting system that involves you planning what to do with your income before you get it.
Instead, this budgeting system only deals with the money that you actually have, “in your hand” so to speak. This makes sense when you consider that the origin of this method is the old practice of people collecting their cash on payday, and dividing the money into different envelopes, to ensure that there would be enough money available for rent, groceries, and other significant budget categories.
And that’s exactly how the “envelope system” works. You wait until you get paid, and then you decide which “envelopes” – or budget categories, if you prefer – need your attention, and how much money should be put aside for each.
This, in and of itself, is already a major point in favor of this particular system.
When we budget in advance, we are dealing with the unpredictable future. Of course, you should have a reasonable idea of how much money you expect to earn in a given month, and that amount should be fairly consistent. Nonetheless, things happen. Payments are delayed, there are administrative errors at work, or in the bad scenarios you may find yourself without a job unexpectedly.
There are ways that people deal with the sense of uncertainty. For example, by getting high-quality credit cards via companies such as CardGuru, in order to have some emergency spending power on standby.
As a rule, however, it’s a far better policy to plan with what you have, than with what you’re still waiting for.
So, let’s say you get paid once every two weeks, rather than once per month. You know that your monthly rent costs will amount to a certain number. Does that mean that you should pay for the whole thing up front, as soon as you’ve been paid?
Well, maybe, maybe not. This is where discretion comes in. But by being aware of your future expenses, you can at least begin to put some money into the right categories, in advance of those fees coming due, and be quite certain that the money you’ve set aside will be available when the day comes.
It will give you a sense of your true expenses, upfront
One of the brilliant aspects of the envelope budgeting method, is that it forces you to get a real sense of your expenses, budgeting goals, and so on – upfront.
When many people budget, they are just moving money around in an unfocused kind of way. It’s common, for example, for people to set aside a significant chunk of their income as “long-term savings.”
The problem with a category like “long-term savings”, is that it just isn’t very specific. What exactly are you saving for? When do you know that you’ve got “enough” set aside for that thing?
With such an unspecified budget category as this, it’s all too common, and easy, to start dipping into those savings whenever a convenient excuse presents itself. Sure, these are “long-term savings,” but you could really use that new jacket that you saw on sale…
By following the envelope system, on the other hand, you assign all your money to specific, preset categories.
If you’re putting money into “long-term savings”, those savings should be attached to a specific purpose. Are you saving for a mortgage? For retirement? For a big vacation in a year or two?
These are important questions to answer if you want to be consistent with your budget, and the envelope method helps you to answer them.
You will be able to more easily move money between “different envelopes” if your spending is off
One issue with many “conventional” budgeting system that people follow, is that they end up being an “all or nothing” kind of thing.
You put money aside, in theory, before it’s in your account, and dedicate it to certain broad categories (often in a pretty idealistic kind of away) and then, as soon as you falter and step outside of the constraints of your budget just a little bit, you lose all sense of structure, and all those careful calculations you’ve done unravel on the spot.
With the envelope method, it’s easy to move money between different envelopes, as a means of adjusting on the go.
From time to time, we all step outside the parameters of our budgeting ideals. That’s just life. So, if one month you spend more money on clothes than you had originally intended but find that you can afford to spend a bit less in another category, you can move money between your “envelopes” to manage the balance.
Of course, this is much easier to achieve with the help of tools such as YNAB, and Budgeting with Buckets.
The system will force you to engage with your budget, not just track your spending
Many of the most popular personal finance apps and services in use today, are essentially just tracking tools, rather than what you might call “active budgeting tools.”
Mint.com, for example, is an extremely popular service, which is mostly based around updating a dashboard and a series of graphs, with data imported from your bank account, to tell you how you’ve spent your money in the last month.
This may or may not be useful for seeing trends over time. But it’s not very useful for proactively planning the future.
The envelope budgeting method forces you to really engage with your budget, to think about it, and to plan. It doesn’t just track your spending.