How does the Envelope budgeting system help you in your finances?

Oct 13 2013, 12:25 IST
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This is the literal way of maintaining an Envelope Budget, which has been followed for centuries by people across the world. This is the literal way of maintaining an Envelope Budget, which has been followed for centuries by people across the world.
SummaryExpenses have increased, managing spending patterns has become an even important part of wealth building exercise.

is the key to the success of this practice, which will help you control your expenses. Here are a few important points to remember when you follow the Envelope Budgeting system, such that you control your expenses:

Do not transfer money between the envelopes: As tempting as it may sound, having some excess money left in one envelope does not mean you use it up in another category where you are falling short. This system aims to control your expenses in individual categories. By transferring money between the envelopes, you are effectively defeating the purpose of the system. Hence remember that any extra money left in the envelope goes towards your investments as a bonus and should not be used up in other categories.

Money spent once cannot be refilled: When you spend money from an envelope, it is gone. There is no question of refilling the envelope before the month ends. You must learn to manage your expenses with the money that is already remaining in the envelope, and thus there is a need to spend this wisely. Any temptation of putting more money into the envelope and spending more than what you had initially budgeted for, renders the whole practice meaningless.

Emergency expenses need to be compensated immediately: Sometimes, if there is an emergency, you may resort to spending using your credit or debit card. It is ok to do so, provided you are able to immediately adjust for such expenses in your budget.

Penalize yourself for breaking the rules: If you happen to fall out of the system and spend more money than you initially allocated towards any expense head, then you must penalize yourself to avoid the mistake again. For instance, if you had allocated Rs.3000 towards eating out, but end up spending Rs.4,000 towards this during the month, then you have spent Rs.1000 more. Invest double or treble the amount overspent towards an investment or reduce this amount in your next months envelope.

Many people start this system enthusiastically, but do not follow it beyond a few months into it. Inculcate the discipline needed to control your expenses, and you can see the difference it makes on your finances.


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