In times of financial hardship many people start to seriously reconsider the way they handle their income. While the philosophy stays pretty much the same – spend less to have more – the methods that people use to achieve their financial goals often vary greatly. And, as is the case with things like fashion and dieting, new money-saving “fads” pop up from time to time that present people with new options of ways to keep their wallets as full as possible.
One current trend is the “envelope” budgeting system, sometimes called the “cash only” system. This system is fairly self-explanatory. You budget your income, dividing up the funds into specific categories. After taking into account expenses that need to be taken care of electronically (such as bills paid online or through check), you withdraw the funds for the remaining categories as cash. You then divide that cash into envelopes according to the budget you have set, with each envelope representing one category. So, if you have $50 budgeted for “entertainment,” you put $50 cash into your “entertainment” envelope.
After that, spend as you will, but remember: once the money is gone, it’s gone. To make this system effective, you cannot add to your cash supply, even from other envelopes. You also cannot use your debit or credit cards – ever. With time, the idea is that you will perfect your envelope system, knowing what categories you need to have and how much cash you need for each category.
Sounds great, right? Well, sure, it can be. But, as with any diet, exercise regime, or self-help course, you are the ultimate factor in the effectiveness of the program. As such, it’s important that you consider both the pros and cons to the envelope system before adopting it as your family’s financial plan.
Pros:
- There’s no way you’ll spend more than you have. By using only cash, you are guaranteeing that you will not overdraw a bank account or rack up a balance on your credit card. You are only using what is right in front of you, and once it’s gone, it’s gone.
- You’ll end up spending less in general. We spend less when we pay in cash, even compared to using a debit card. When the money is right there in front of you, it’s real. Forking over a ten dollar bill for lunch makes more of a psychological impact on you than swiping your debit card.
- You can personalize the system to fit your needs. By customizing your own categories, and setting your own budgets for those categories, you are in full control of your finances. As you become comfortable with the system, you can add or take away categories, and adjust budgeted amounts as necessary. You can also decide when you refill your envelopes, based on when you get paid.
Cons:
- You may not want to deal only in cash. While this system could be adjusted to any circumstance, you may have a hard time being comfortable with keeping large amounts of cash in your home, or carrying it in your wallet. You might also find the system impractical for traveling, and should consider how you would handle business or personal trips under the cash only system.
- It could take some time to get used to. While trying to perfect your envelope budgeting system, you may find yourself facing a week without any money left for groceries, or with way too much allotted for clothing. While this can be avoided with careful planning, it’s important to consider the possibility when starting the system, to avoid any major surprises.
Of course, how well the envelope system works will be determined by your own dedication. Remember that the most important thing is that the system helps you spend less than you’re bringing in. As long as your system does that, you can personalize it any way you want. Consider your options, weigh the pros and cons, and plan carefully before making a major change in how you manage your finances.
About the author: Katie Harris is a freelance writer for Alliance Credit Counseling, a non-profit organization specializing in debt management, bankruptcy counseling and credit counseling.