The envelope method is an old-school budgeting system made famous by bestselling author Dave Ramsey, and is great for people who really want to get a hold on where their money is going. But how does it work? Consider below.
How It Works
To create a budget using this system, stuff a series of envelopes with cash. Dedicate each envelope to a particular spending category, and note the amount you have put into each envelope.
For example, your envelopes might be labeled “Food ₦5,000” “School Supplies ₦2,500” and “Transport ₦2,500” etc. Since you can’t perfectly predict all your expenses, especially in the beginning, keep one “Miscellaneous” envelope as well, for expenses you haven’t planned for.
At the end of the week, note the amount you have left in each envelope. Your Food envelope, for example, may have ₦3,500 left. Your School Supplies envelope may have ₦2,000 remaining. Your Transport envelope may have gone over budget, especially during that period of fuel scarcity when transport fares went up, and you had to use ₦500 from the Miscellaneous envelope to cover the shortcoming.
Doesn’t this appear to be an easier way to track your spending? Of course it is! It will help you see your spending habits within different categories, without having to write down every single transaction!
Why It Works
- The reason the envelope system works so well is that you can see how much and how fast you are spending, since the money in the envelope keeps decreasing each time you take out of it. You would find yourself thinking twice before making any kind of buying decision.
- You would be more deliberate. Since you can see exactly how much money you have for the month, and can see it going down, you would be better about budgeting that money over the course of the next four weeks.
- Also, the envelope budgeting system helps to remind you that once you have spent all the money in a category, you literally can’t spend any more. You will have to find a way to do without or decide to take money from another category’s budget (which means that you have less in that category for the month), and this makes it a lot easier to stay on track and not overspend in any category.
Yes, this system may be old school and low-tech, but it gets you down to basics, and when you are down to basics, it’s a lot harder to make mistakes.
Trust me, this budgeting system works like magic because I use it myself, and it is the best system I have ever used!
NOTE:
Make sure to put these envelopes in a safe place! You don’t want anyone getting their hands on your money and leaving you in a mess!
