3.3.2 Budgeting – taking control
The best of intentions and plans can be difficult to implement. One method suggested by personal finance experts to help implement a budget is an ‘envelope system’. This system uses hypothetical or, perhaps, real envelopes for each type of expenditure, and allocates the amount of money planned for that type of expenditure to its envelope. An alternative could involve using (empty) jam jars. Another way is to set up separate savings accounts for certain – more major – items of expenditure like holidays or a new car.
Once the different directions of spending and their ‘envelopes’ have been worked out, money is allocated to each of them and the ‘envelopes’ filled, by putting that money into different accounts. For example, the bank current account may be allocated an amount each month to pay for food and regular living expenses, such as travel costs, and commitments, such as insurance premiums.
A savings account may be allocated money for infrequent expenditure, so that money is built up to pay for holidays, birthdays or Christmas, while another savings account may be used for saving in case of an unexpected crisis. A fixed amount of cash each week is also needed for those areas usually paid for in cash, such as entertainment.
The idea of the envelope system is that you do not then switch money between these areas – when the envelopes run out, they run out. This creates a strong discipline to keep to the allocated budget amount.