Budgeting is a difficult, but necessary, part of being an adult. It does not feel good to live paycheck-to-paycheck, and getting your finances in order requires knowing where your money is going. While there are tons of apps or websites to help you organize your money, I am going to share the first of three great systems to manage your money.
System 1: Envelopes
What is it?
Fans of Dave Ramsey are all too familiar with the envelope system, but you don’t have to use his financial advice to make it work. The point of envelopes is to have a physical place to put your money. It has been shown that spending physical money affects our brains more than cashless transactions, and it can be perceived as more painful. This means that the money you put toward different spending/saving categories will be more thoughtful.
How does it work?
The envelope system works by breaking down your spending, saving, and giving money. Usually, people will break spending down further into categories such as: groceries, clothes, entertainment, and gas. Sometimes people forgo the saving envelope and keep that money in a savings account. This can be helpful if you have a large amount of savings, or if you would dip into your savings.
Once you have your envelopes/accounts set up, you can assign a percentage or dollar amount of your monthly income to each. While you should not lower the amount going toward your savings or giving, you can switch around amounts in your various spending envelopes, as our monthly purchases may fluctuate. Just make sure you are not pulling from necessity envelopes (such as bills or gas), but are pulling from an envelope you can afford to lose money in (such as entertainment).
Who benefits from this system?
This system can be used by anyone, but parents find it is very effective for kids. Kids are unable to think as abstractly as adults, so having the physical component to this budget is beneficial. Plus, you can instill good savings skills and charitable habits early on. One way you can get your kids excited is by helping them save up for a specific toy or experience they would like (and the money should come from spending, not savings). When they are able to afford it, you might find that they would rather put that money toward something even better!
Another person who can benefit from this system is the shopaholic. It is easy to swipe a card or online shop, but having to use money to physically purchase something means seeing the resource deplete. Plus, once the physical money is gone, you will truly understand its value.
If you’re looking for a way to manage your money, the envelope system is an excellent choice. However, if this system is not for you, stay on the lookout for my next post, where I provide the second system: assigning a purpose to your money.