It’s Called Currency

If you’re just starting out on learning how to manage your cashflow, here’s a technique that can work to curb overspending: use envelopes to allocate cash to certain categories. This is often useful when you tend to overspend on things like eating out, groceries, clothing and entertainment.

The technique: write the category on the outside of the envelope and put the budgeted amount in cash inside. As you go through the month, you spend only out of that envelope for anything in that category. Trip to the movies? The money comes from the entertainment envelope. Buying clothes for the kiddoes? Pull from the clothing envelope. Friends inviting you for a meal out? Check your “dining out” envelope first; if there’s enough money, then you can go. If not, it’s dinner at home this time (or they pick up the check).

This technique helps with discipline because when the money is gone, you stop spending. You can’t overspend from an empty envelope. It’s also helpful if you are trying to save for something specific. Put an envelope labeled “new tires” in a safe place, where neither you nor the spouse and kids will be tempted by it. Each month, put the budgeted amount of cash for tires into the envelope and forget about it. You won’t accidentally spend that money on something else, and when it’s time to buy tires, the money will be there.

Using cash in this manner helps tremendously with self-control, but you have to stop yourself from moving money between envelopes. Don’t raid the tire fund so you can rent videos when your entertainment envelope is empty. Don’t use your grocery money to splurge on a new pair of shoes, even if they’re on sale.

Identify areas where you tend to overspend or forget to save. Any of these is ripe for an envelope. You can even subdivide a particular category. For example, I’m an avid reader and I tend to overspend on books. This is a form of entertainment for me, so I keep an envelope in my purse with my “book money” portion of our entertainment budget. When the envelope is empty, I skip the trip to the bookstore, or I still go and I just write down any finds (on the empty envelope) for when there’s money again.

In what areas might envelopes be a good solution for you?

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