Recently I read a post by Anthony Moore on Brazen Life. Through the post Anthony brought us back to an old budgeting technique; envelopes. He suggested that the best way to save money is to separate cash into envelopes for different categories, such as rent, utilities and groceries. The envelope system helps you save money for two reasons:
- It’s harder to spend cold hard cash than swiping that pretty little card, so you’ll be reluctant to spend money.
- You will have a limited amount that once it runs out, you can’t spend anymore.
My Envelope System
I decided I wanted to use the envelope system to save up for purchases I’ve been wanting; a new iPhone, an iPad, an external hard drive and this last one isn’t really a purchase but, I wanted to save up for an adventure fund. The process took 4 easy steps:
I first had to research how much these products cost. I compared different sites and accounted for any additional features I would want.
2. Think Realistically
I then thought about when I would need each item and how much I could afford to take out of each paycheck. I also wanted to spread the purchases out so I wouldn’t be spending too much money at once. I decided the adventure fund “deadline” to be first so I can use it for the summer, then the iPhone for November (I’m sure by then there will be a new iPhone out), next the iPad for December and lastly the external hard drive, which I need the least so I’ll wait until January.
3. Do the Math
I had to decide if I wanted to make a withdrawal monthly or from each paycheck. I decided to do it by paycheck because the amounts will be smaller. I get paid bi-monthly so from now until June it will take me 4 more pay checks to get what I need for the adventure fund. For the external hard drive it will take 20 paychecks, which sounds like a lot but it’s really only 10 months!
4. Make it Happen
To create a system I labeled one envelope per purchase. I included the goal amount, how much to save per paycheck and the month I wanted to be finished by. I also put up the amount left on the whiteboard in my bedroom to keep me motivated.
I like using the envelope system for saving up for purchases rather than a monthly expenses because I like the benefits of having a card. I like using my credit card for groceries so I can get cash back. I also like the online options banks now have with automatic payments and transfers, cashing a check without having to go to the bank and I do like the tiny interest I make by letting my money sit there. I also like how I can manage my money anywhere I am using my computer or iPhone. I’ll talk more about how I manage my money online with Mint.com in my next post.
If you’re going to use the envelope system I would suggest choosing a couple areas where you want to make sure you don’t go over budget. Maybe you could look at where you tend to spend more money and train yourself by using this system. I bet we could all spend less money on going out to drink and meeting up with friends. Putting $100 for the month in an envelope might force you to be smarter with your “living it up” lifestyle.
What areas do you have trouble staying within your budget? Do you have any other budget or money saving tricks?