Friday, March 12, 2010

Envelope Budgeting

Yesterday I posted my 'All in one pouch' (blogged here) and how different compartments in the pouch are for storing the month's expenses for that category. It was interesting to read different responses on ways people manage and track their monthly spending habits. The 'All in one pouch' was inspired by the envelope budgeting method, but instead of using separate paper envelopes, I made a fabric pouch with compartments for different categories. 

What is envelope budgeting?
A simple (our mothers and grandmothers might have used this system) yet effective way to organise your finances and spend wisely. Get more ideas of the system from a youtube video here

Envelope budgeting basics
1. Decide and list down the spending categories for your budget and set the spending limit for each category. Of course some things are better automated such as rent, utility bills, insurance, school/tuition fee and mortgage. My spending categories are food, petrol, entertainment, personal allowance. 

2. Using one envelope per spending category, write the name for each category and the monthly budgeted amount on the envelopes. This is where my 'All in one' pouch comes in handy. You can use simple paper envelope or make your own (for inspiration see samples here and here). 

3. You are all set up now, when you make a purchase pay using the cash from that particular category. The principle is easy, when you run out of money from that envelope, you stop buying *grin* 

With the envelope system at any given time you know with absolute certainty how much money you have on hand and what it’s for. On average you will simply spend less on purchases when you pay for them with cash then you would with credit or even debit cards. When you have to hand over your cold hard cash it really makes you think about the expense.

Anybody using similar system or other system in managing your finances.. care to share??Pin It

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