One of the successful budgeting systems that has ended over the years is called envelope budgeting. In earlier times, it was used to effectively manage a household's money. It allowed you to know exactly where you were in your budget plan at any point in time and helped avoid credit card debt while providing an easy way to save.

So what is envelope budgeting? Quite simply, it is the dividing of income into categories of expenses, and then pulling that money from the category when money was needed to be spent. The money is literally put into paper envelopes.

For example, let's assume that income for the month was $ 3000. When that money was received for the month, it would be divided up. Let's assume that expenses for each month are budgeting to be the following:

  • Housing – $ 600
  • Utilities – $ 100
  • Food – $ 400
  • Savings – $ 600
  • Auto payments – $ 400
  • Auto Insurance – $ 200
  • Entertainment – $ 100
  • Auto Repair – $ 100
  • Medical Expenses – $ 100
  • Clothing – $ 100
  • Cell Phones – $ 100
  • Gifts – $ 100
  • Vacation – $ 100

After the $ 3000 is divided up for the month, each envelope would have the amount indicated above. When housing was to be paid, the housing money would be withdrawn from the Housing envelope (leaving it empty). When food was needed, money would be taken from the Food envelope, and so on.

When there are expenses that are needed on a less regular basis, such as Auto Repair, money accumulates in the envelope until it is needed. This allows you to save money for expenses until it is needed. The same method can be used with expenses that are needed only once a year, like automobile registration. Accumulate the part of the expense each month throughout the year and then you have it when you need to pay that expense.

The advantage of this budgeting method is that it is easy to tell how much money is left for the month for a specific category by seeing how much money is left in the envelope. If all the money for entertainment for the month is already spent, then no more can be spent on entertainment until the following month.

Another advantage with the envelope budgeting system is in how it helps with credit card use. Add another envelope for credit card payments. When a credit card is used for some expense, remove that money from the associated category and move it to the Credit Card envelope. At the end of the month, use the money in the Credit Card envelope to pay the credit card bill. This is a huge help in managing credit cards, because you are accountable to the amount of money in the envelopes, even when using your credit cards.

Modern day technology makes envelope budgeting easier than ever. The availability of computers and the internet make it easy to do envelope budgeting, giving you all the advantages of this system, but without the paper envelopes.



Source by Scott Carey

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