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How to budget using the envelope system

NEWS
By By Peter Kamuri | August 13th 2012

By Peter Kamuri

Regardless of your lifestyle and the amount of money you make, having a complete control of your finances calls on you to have a budget and live within it. Most of those who are always scratching their heads every now and then because they cannot tell where all the cash they had has gone do not plan well for their money.

A good budget helps you overcome mismanagement of resources, which can affect your ability to meet your basic financial needs. One way that can help you to have control of your money is by using the envelope system.

“The envelope system works by first determining how much money you earn over a given period of time. Then you determine how much goes to the various spending categories you have and then put the money you allocate in an envelope. Each category should have its own clearly marked envelope,” says Francis Okore, a financial expert.

For instance, if you budget to spend Sh15,000 on car fuel per month, you will take this amount and put it in an envelope clearly marked ‘fuel.’ Any time you want to fuel your car, you just get the envelope and get the amount of money you want to spend. If there is some change, you just put it back in the envelope.

Resist temptation

“In case you exhaust the money that you have budgeted for in a specific area, you should wait for the next budgeting period. However, you may decide to increase the budgetary allocation in case the money you had allocated was not enough,” says Okore.

This will happen to other budget categories you have. As you make purchases throughout the week or month, depending with the period you have budgeted for. You must be disciplined and only draw money from this envelope, and resist the temptation to spend money meant for other areas or borrow to meet other expenses.

The envelop system has been around for long and many people have used it successfully. When you are only paying for things using cash, and you run out of cash, it is not possible to overspend which means you will live within your budget.

Okore observes, “The envelope system also helps one to be in tune with his or her budget as one is constantly reminded of it every time they reach for an envelope to spend from. It is also a less wasteful method of spending as you are take time to think about every expenditure, and room for impulsive spending is minimized.”

He advises, “For you to succeed in using the envelope system to save money and make sure that you live by your budget, you have to have a great deal of self-discipline. Although managing numerous envelopes can be burdensome, they can also be very rewarding by keeping you on track to meet your financial goals.”

“For you to create an envelope system that works, you need to start by coming up with a budget. Determine how much money you make and how much goes out as expenses to be able to come up with a realistic budget,” Okore advises.

Paperless money

Okore notes, “The next important step is to divide your expenses into various categories. This are the different areas where you will spend your money in. They can include money for clothing, food, fuel, entertainment, travel, utility bills among others. Then create an envelope and fill each with the money you have allocated to that particular group.”

Angela Mwangi, a financial advisor working in Nairobi advises, “As you start to spend, try as much as much as possible not to raid another envelope to cover a shortfall in another. Moving money between envelopes will see your spending plan collapse sooner than later. The best practice is to revise your budget to make it as realistic as possible.”

She adds, “In case at the end of the budgeting period you have some money left, put the leftover into savings. You can also use the money to clear some debt or reallocate it to another category that did not get a fair allocation. At the end of the budgeting period, refill the envelopes again.”

As you try the envelope method, you must be prepared to use the first few months as the trial period. This will help you to come up with figures that work best for. In case you run out of money before the month is over, just try harder the following month.

“Sometimes you may have to revise the period. A monthly envelope system may not work for some people and revising it downwards to a day, weekly or bi-weekly can help. The bottom line is to come up with a system that will fit your needs,” advises Mwangi.

However, the envelope system is not without the flipside. Some people are not very comfortable using cash when making their purchases. They prefer using paperless money due to the convenience it brings.

 


 

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