Nowadays, earning more is not the only aspect in the equation of building wealth. As expenses have increased, managing spending patterns has become an even important part of the wealth building exercise. It is often seen that many households are unable to control their expenses on a particular head irrespective of trying hard. A solution to this is to follow the Envelope Budgeting System.
Envelope Budgeting System is an age old system of efficiently managing expenses, such that you do not over shoot expenses under any head. That is, various expense heads are labelled and categorized differently and you keep aside money for each of these heads separately in different envelopes. This is the literal way of maintaining an Envelope Budget, which has been followed for centuries by people across the world. Although the mode of maintaining an Envelope Budget may have changed along the years, the essential problem addressed is the same - to segregate expenses and not to spend money on different things from a single pool of money.
Let’s understand this with an illustration. Suppose you have a monthly expenses budget of Rs. 30,000 on various heads as follows: Rent: Rs.15,000, Grocery: Rs.3,000, Utility Bills: Rs. 4,000, Salaries of maid and cook: Rs.2,500, Eating out: Rs.3,000 and Miscellaneous expenses: Rs. 2,500. Now if you were not following the Envelope Budgeting, you would have all this as a bulk amount and spend as and when the expenses arise. On the other hand, if you follow the Envelope Budgeting, you must set aside money towards each of these expenses in separate envelopes. So in effect, you will be maintaining 6 envelopes in the beginning of the month, with different amounts as specified above. As and when you need to spend on a category, you can take the cash from the respective envelope and spend. This way, you will be forced to maintain you expense levels within the limit of money you put in the respective envelope. If you happen to be making a cheque or credit card payment for any expense head, then earmark this also. But as far as possible, it is better to stick to cash payments for such regular expenses to help you maintain discipline.
So, what is the key to the success of the Envelope Budget system? Is it something which everyone can follow easily? The Envelope Budgeting System sounds far easier than what it actually is. Discipline