January 29, 2010

Overview of Traditional Envelope Budgeting

Envelope budgeting is a very simple and time tested method of managing your money. It is an easy way to know exactly how much money you've got on hand and what it is allotted for.

Since practical examples usually make the most sense, let's illustrate the method with a brief and simplified example.

Assume your rent is $500 per month, your groceries are $250, and your electricity is $250. To use the "old style" envelope budgeting, you would simply take some paper envelopes, label one “Rent,” label another “Groceries,” and label another “Electricity.”

Now let's assume you receive all of your money in cash. No checks. No direct deposit, etc. - 100% cash. For this example, you have received $1000 in cash. To budget it using the envelope budgeting method, you would divide your cash and put $500 in the Rent envelope, $250 in the Groceries envelope, and $250 in the Electricity envelope.

Putting the money into the proper envelopes is only the first part. Of course, eventually, you will need to buy some groceries, pay the rent, and pay the electricity bill. Here again, to pay for those items, you simply take the money out of the proper envelope and pay the bills as needed.

The point is to always know how much money you have, exactly what you have it for, and then to exercise the discipline to stay within the amounts you've designated for each envelope category. When the cash is used up in a particular envelope, it's out. That is all you spend in that expense category until the next time you receive money for it.

There you have it. That is envelope budgeting in a nutshell. Simple but effective.

Now here's the problem - imagine trying to do this with your cash, several checking accounts, savings accounts, what you have charged to your debit or credit card, and investment accounts. With so many accounts, envelope budgeting would be next to impossible. It would be a challenge just to keep up with the accounts, let alone the amounts you have in each budget category.

Well, no longer thanks to CommonCents. CommonCents simplifies and streamlines the whole process for you. It handles all of the accounts and all of the envelopes, all in one simple to use system. Managing your money was never as easy as it is in CommonCents.

Note: Just because you use CommonCents doesn’t mean you can’t use paper envelopes too. On the contrary, you may find that the traditional method complements CommonCents nicely in helping to control spending in certain variable categories such as groceries and recreation. CommonCents can be used to more effectively manage these envelopes as well.

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