I've seen a couple references to the envelope system in the answers to other questions, could someone using this method of budgeting describe your process in detail and why it's effective? I've been trying my best to use almost no cash so that all my spending shows up in my bank statement.
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The envelope system refers to a budgeting system where at the beginning of the month (or on your pay day), you allocate all your pay into a number of envelopes. The envelopes should be for your expenses and savings categories. For example, food, car, home, vacation, retirement. When spending in a particular category, you then spend only from that envelope. If you do run out of money in a category, you can move money from another envelope, but its not recommended that you move money from your savings categories/envelopes to the expense envelopes/categories. Check out Mvelopes for an electronic version of the same principle, so that you don't have to keep all the money in envelopes at home. Another option is to use virtual accounts in High Interest Savings accounts like INGDirect. You can also use this system when paying with your credit card. For example, if you pay $10 for petrol on your credit card, move $10 from your car envelope to your credit-card envelope. That way, when you get the credit card statement, you have the money to pay the entire amount in full (assuming you were not carrying a balance before). |
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