Envelope budgeting

Envelope budgeting was the most popular system used by almost everyone when computers and software were just figments of our imagination.

It involves the use of paper envelopes filled with the amount of money that you've allotted for a particular expense. You use an envelope for each type of household expense such as rent or mortgage, utility bills, food, credit card repayments, savings etc.

What it's really about

This system is so simple that anyone can work with it. You start off with paper envelopes which you place money in for a particular expense and when all the cash in the envelope has been spent, it means that you've reached the limit of the budget you've set for that particular expense. So the real challenge is to make sure the money lasts until the next payday. Remember, after the cash has gone you will have no other option to make new purchases – no overdraft, no credit cards, no bank loan.

If you're intrigued by this process and would like to give this a try to see if it'll work for you then let's put this into practice!

How envelope budgeting works

To do this accurately, it might be worth reviewing your current spending habits, giving them a closer look and checking the average amount you are spending on a particular expense.

For example, with your 'Food' expense, in previous months you were spending £100 per month on average, put that amount in the 'Food' envelope. Before you go shopping, make a list of what you need and only what you need. Take your list and only enough money that would cover the items on the list.

If you can, set yourself a limit each time you take money from your envelope so you know you've got cash left for the rest of the month and jot down on the envelope the amount that you've taken.

The idea with envelope budgeting is that you can always see how much you've got left, so you can spread your cost, adapt your spending, stretch your budget or if you've got some cash left over, perhaps treat yourself. Never ever borrow from one envelope to fund another expense as you'll just end up in trouble. Reap what you sow!

There are few other benefits of envelope budgeting.

• You're now a cash customer and so have the chance to bargain over price. You should be able to get at least 5% off for not using plastic as the vendors would willingly pass on any savings on charges from the bank straight to you. So start asking for a discount, even on the smallest purchases.
• You'll avoid overspending as you're seeing immediately where your money is going. People often overspend when they use plastic to pay for goods as they can't 'see' the money going out of their account.
• Using this system will turn you into a considered purchaser, so you'll never have to regret an impulse buy again.

Start using cash today

There's no harm in trying this system since it can only bring a win-win situation. So, go back to basics and simplify your life with cash and envelope budgeting.