What is envelope budgeting
What is the most effective way to save? [closed]
"Envelope Budgeting" is pretty straightforward. It's simple enough that you can teach kids and flexible enough that you can use it as an adult.
The general idea is that you take your cash (no bank accounts in the simple version) and put it in envelopes marked for what it is supposed to be for. For example, you get paid, you cash your paycheck, and you put $ 100 in an envelope that says groceries.
Now when you go out to eat, you get the money out of your grocery envelope and spend it on groceries.
If your envelope is empty, you will go hungry.
In the simple version you have envelopes for things like "food", "candy", "toys", "games". etc. (The easy version is usually taught to children.) So you want a $ 60 game and your game envelope is only $ 5. Well you can't get the game. You need to add more money to the game envelope. You need to eat so that you can invest money there, but you may not need toys. So you can divert some incoming money from toys to games. Sure, it will be a while before it hits $ 60, but now, with simple kid-friendly calculations, you can see how long and more importantly, you can make decisions about what is more important. Candy or toys?
In the adult version, things are similar. We just have more envelopes. We have rent, car payments, gas, food, electricity.
Then we need some envelopes for "savings" and "retirement". Etc.
Now when you get your paycheck, prioritize your money and stuff it in the envelopes. How much you put in each envelope is easy. Enough to pay for the thing. Savings and retirement serve different goals. They want to save $ 6,000. Just like this game in the kids version, you won't get there all at once. But you can see and make decisions about what is most important. You want $ 1,000,000 to retire. Sure, but it will take a while to fill this envelope.
At its core are the following important parts:
- You only count the money you have in hand. No future money or expected money of any kind.
- You are only spending money from the correct envelope. Your rental envelope is not enough. Then you will become homeless. Thankfully, your car envelope is good so you can at least live in your car.
- You decide what is more important when you put money in the envelope. The rental envelope will be a bit easy, money will distract from the savings envelope.
- You don't use money from one envelope to cover another. Only when you put money in envelopes can you decide that something is more important.
Let me explain the rental example as it is the weirdest one.
You will get $ 500 per week and will need $ 1000 for the rental.
- Week 1 - $ 500 in rental envelope
- Week 2 - $ 500 Rental Envelope <- You paid your rent next month
- Week 3 - $ 500 in other envelopes
- Week 4 - $ 500 in other envelopes
This means that you are spending from your envelopes. In weeks 1 and 2, you will spend the last months in weeks 3 and 4.
They do NOT:
- Week 1 - $ 250 in rental envelope
- Week 2 - $ 250 in rental envelope
- Week 3 - $ 250 in rental envelope
- Week 4 - USD 250 in rental envelope <- Rent paid here for the next few months.
This is important because if you lose your paycheck in week 3 or 4, you will be homeless.
After all, you generally put things in the savings envelope. And you want to hit a savings goal of 6 months on your average paycheck. Once you achieve this goal, you are in good shape and losing your job does not mean you are homeless. You can only draw from savings.
In using these envelopes it is important to understand that the only time you decide what is more important is when you put money in, not when you take money out, and that you are only working with the money that you have today (in your hand ). What do you think you will get tomorrow
Money in the bank can be split into virtual envelopes. Money in savings can be in any vehicle, but in general you want a short-term emergency envelope (savings account) and a long-term envelope (e.g., CDs).
Take a look at YNAB.com for free lessons on how to use their software to manage a handling system.
And I know there will be a comment section.
Rent against the homeless is a real example. For example, you shouldn't take money out of the grocery envelope to cover rent. This may seem silly, but if you do, you made bad decisions deciding where the money goes. Use the emergency fund envelope to cover the rent and spend less money on groceries next time. It is this "rule" that makes envelope budgeting good. You may be homeless, but you can eat, drive to work, put gas in your car, and pay your bills. Usually taking money out of different envelopes creates a spiral of trying to do the sensible thing, but you end up doing worse.
Migrating to envelope budgeting (in the narrower sense) is difficult. The best way I've taught people is to envelope budget only an increasing portion of their income until their envelopes are full enough for a month. That means you may only budget 10% of your income initially. But unless your situation is such that you can cover all of your bills with one paycheck, you cannot transition without breaking the "don't take money from other envelopes" rules.
- What does 2 Corinthians 3 7 mean?
- Who's your celebrity singer crush
- Can books of general knowledge have copyrights?
- Is the expression wavy line an oxymoron
- How to cook chicken curry
- Can Testosterone Decrease In Your Twenties
- What is a plot in the novel
- How can I enjoy HD channels
- What does mild heterogeneity of the liver mean?
- What is the best multipurpose microphone
- Every app for everyday makeup hacks
- What are the functions of the spleen
- How do you deal with a programming problem
- Are Slovaks Catholic
- What is an articulated joint used for?
- What do most Americans think of gerrymandering
- Did cycling improve your running?
- How much do you know about GlowRoad
- Is Chennai a well planned city
- What are meta descriptions and meta keywords
- How concerned is Pakistan after the Pulwama attacks
- What kind of saxophone do you play
- What does androgen binding protein do
- Which country persecutes its citizens the least?
- How long does the average survey last
- Which college football stadiums have domes Why
- Can Zyrtec and Prednisone be taken at the same time?
- Is the food cooked in submarines
- Who were Chopin's contemporaries?
- What are your favorite Disney sequels
- Can bronchitis get better without antibiotics
- Why isn't zero zero
- Who were the main Greek philosophers