The Envelope System is a great way to save money.
It works by allocating money for certain categories like eating out, shopping, movies and so on in envelopes. Once the money is spent in the envelope, it's all for the month. You can not spend more.
It's a great system to use if you're in debtBecause it forces you to be actively aware of your expenses – but is it all that is cracked?
Let's analyze exactly how the Envelope System works, because it is good and some of the disadvantages in using it.
What is the envelope system?
The Envelope System is all about one thing: Becoming more aware of the way in which it is spent.
It involves a simple four-step process:
Step 1: Calculate your monthly discretionary expenses
Your discretionary spending is all the money that remains after paying the essential (rent, utilities, etc.).
And it's simple: just take the net monthly pay (income after taxes) and subtract fixed payments such as:
- Car payments
- Electricity bill
- Water bill
- Gas bill
- Cell phone bill
- Any debt (eg Credit Card, Student Loans, Mortgage Loans)
All that is left is the money you can spend for whatever you want for the month.
For example, suppose your net monthly pay is $ 3,000. After accounting for your rent ($ 750 / month) and utilities ($ 150 / month), find out that you have $ 2,100 left. Awesome! This means that $ 2,100 can now be spent on things like eating out and movies.
Which brings us to …
Step 2: Create your shopping buckets
So you know how much you can spend. Now it's time to decide what to spend it.
To do this, you will create buckets for all the discretionary expenses you make in a month, such as:
- Eating out
- Going to the bars
- Watching movies
- Pay for the gas
- Shopping for groceries
- Buy books
There are many different buckets that you can create. That's why I strongly suggest you use my Rich Life philosophy. This is the idea that you should just spend on the things you love and help make your life rich – ignoring everything else.
I love buying lattes every morning? Create a bucket for "coffee" or "drinks".
Can not you take new movies when they go out? Create a bucket for "film" or "entertainment".
Is it easily influenced by the special of your local bar on Jägerbombs? Create a bucket for "wrong decisions".
And if you do not like these things, guess what? You do not have to create a bucket for them!
Spend about half an hour writing the pails to which you want to spend your expenses. Some suggest:
- Do the shopping
- Transportation (eg Bus, gas)
- Eating out
- Entertainment (eg Movies, concerts, theater)
Once you have your buckets, it's time to move on to the next step:
Step 3: Put the money in physical envelopes
Now it's time to put the "envelope" in the Envelope System.
This means going to your bank or to ATM and get your discretionary spending on cash. Once you do, put the money in physical bags dedicated to the buckets you invented in the previous step.
If you have a bucket for movies, you would have an envelope labeled "film" with money in it.
It is not even necessary to use physical envelopes. One of my friends who started tracing her for a while ago had a great system: she created a separate bank account with a debit card.
At the start of each month, he transferred around $ 200 into it. So when she goes out, she spends that money. And when he's gone, there's more It's a fantastic system that helps her become aware of what she spends.
If you set up a debit account, be sure to call your bank and tell them that you DO NOT WANT to spend more than you have in your account (this is known as nighttime overdraft protection). If you do not, you may incur a tonne of overdraft fees.
(By the way: if you happen to slip and find yourself slapped with some taxes, here is a practical guide to make them give up.)
Some of my most nerd friends (even more or less all of them) are also more detailed with their system. Here is a table created by one of them:
"Every month, I try to cut the amount and the amount I spend on something," a friend told me. In less than eight months, he cut his expenses by 43%.
Personally, this level of analysis is excessive for most people, but it is a great example of how much you can get in detail when you are aware of your expenses.
Whatever system you decide to use, you just have to decide how much you are willing to spend in each category (and this depends only on you).
Step 4: Spend!
Now it's time for the best part: spend your money!
But remember: once you've used all the money in an envelope, that's all. You finished for the month.
The Envelope Method is flexible, though. You can immerse yourself in other envelopes if there is an emergency. However, there will be less money to spend on those envelopes if you do.
It may take 1 to 3 months of experimentation before finding a mix of envelopes that works for you, which is fine! Every person is different.
For example, you may find that you are not using your car as much as you thought, so you have a lot of money left over from your "transport" bucket. You can give that money to another bucket where you could use a little more spending.
After the set-up, you will eventually find a mix of healthy assets that will satisfy your rich life.
Do you still have money? Awesome!
So you implemented the envelope system, did you find the correct amount you want to spend in each bucket and still have money left?
First of all, congratulations on being aware of your spending and having money to spare. It's a fantastic result that puts you in front of the overwhelming majority of people.
Now you can do a variety of things with that extra money.
If you are in debt, use that extra money to pay for it. With your interest rates, any amount of money to pay off your debt will save you much more in the future. Be sure to check our article on get out of debt quickly for more.
If you're not in debt, you can save that money in a high-yield savings account toward a money goal. Or you can put money for an investment like a Roth IRA.
Why does the envelope system work?
The Envelope System is great because it exploits some crucial aspects of human psychology.
A big reason why people spend or do not get up every month is due to the pain of putting money away. This is why doing things like cropping or jumping out for lunch in your favorite deli is a terrible way to save more.
We could do it once or twice, but if we make the decision EVERY salary, we start failing.
The Envelope System allows us to know exactly how much we have to spend each month. For this reason, we spend our money without fault.
The system also works well because of the cash.
The use of physical money in transactions forces you to be incredibly aware of the way you spend. When you watch your dollars go away after buying a coffee, you will be less inclined to spend more.
Do not just believe it on the word. We spoke with the financial therapist and the social worker Colleen Lennon on the psychology behind this:
"There is power in physical money – not just a credit card, I always say that [my clients] take the money you are going to spend in a month and put them in different envelopes.
"They will always come back next week and they will say to me:" I do not want to touch any of that money! I did not order the food. I did not go out for a drink. I just wanted that money in my envelope. I saved all week!
"This is because they started to respect the money once they can see it."
So the Envelope System is fantastic, but what are some of its drawbacks?
What is the trick?
The Envelope System has some negative aspects.
If you are using physical cash envelopes to allocate your spending, you will not be able to pay directly for things that require a debit or credit card (eg Ubers, Lyfts, online purchases).
Also you will not be able to leverage credit card prizeswhich are free benefits and benefits such as airline tickets and refunds for spending things you would have already spent money on.
If you are using a debit card to track your expenses, you will need to be much more diligent about your expenses. You will be much more inclined to spend too much if you can not see how much you are spending. This means that one weekend could blow up the budget for the month.
That's why the envelope system is great for a temporary solution if you're in debt or working for a savings goal. Once you have finished the debt or you have reached your goal, you can stop using the Envelope System.
Take your personal finances
The Envelope System is great if you want to:
If you want to make more money, your envelopes get a little bigger, I want to help you get there.
One of my favorite mantra is simple:
There's a limit to how much you can save. There is no limit to how much you can earn.
Once you realize that your earning potential is unlimited, you can start working on your version of Rich Life.
This is because cutting some expenses is not really feasible for some people, especially if you're paying the salary for salary. However, you can avoid this problem by earning more.
I want to show you two strategies you can use to earn more:
Negotiate a raise
If you already have a job, it's a breeze to negotiate for an increase.
However, it requires careful planning. Above all, you need to show your worth to your employer.
This is because getting an increase is not about you. Concerning what you can do for your boss.
To help you do exactly that, be sure to download mine Definitive guide to get a raise and increase your salary. In it, I have included my best systems on:
- How to be paid for what you are worth Find out how to make a promotion and an increase that could be worth hundreds of thousands of dollars over the course of your life, or more. Get the detailed procedure for negotiating a raise multiple word-by-word scripts that you can use.
- Salary negotiation tactics. What are the signs that show that you are worthy of more respect, attention and income? Learn these three wage bargaining tactics to multiply your chances of getting an increase and prevent social errors from holding you back.
- Beyond the salary I will share even better my material to establish a pay range, get additional vacation days or overcome your boss's most common objections.
Earning more money does not necessarily have to happen inside your work – which brings us to …
A side bustle begins
This is one of my favorite ways to earn more money.
In a week, you can start a freelance business that helps you generate money outside of your normal job. Not only that, but you can climb your side hustle and get as much as you want.
That's why my team and I have worked hard to create a guide to help you make more money today:
In it I included my best strategies for:
- Create more income streams so you always have a substantial revenue source.
- Start your business and escape the 9-to-5 forever.
- Increase your income from thousands of dollars a year through side troops as a freelancer.
Download a FREE copy of the Ultimate Guide today by entering your name and email below and start earning more today.
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