House budget by envelope method. How does the envelope system work in the management of home finances? Is paying with cash in an envelope more cost-effective than a payment card?
As the author of a blog about personal finance, I should probably be ashamed of it, but until recently I have never heard about the envelope method. I found out about her by looking for inspiration to create another article. The idea is so interesting that I just had to devote some space to the blog. In this article, I will explain to you what the envelope method is and how to keep money in envelopes is to save them.
By paying cash, we spend less?
Of course, I am not the author of this hypothesis. What’s more, the blog itself categorically commented on what I think about paying in cash. However, I can not remain indifferent to the reliable research carried out by experts from the American Association of Psychology. It follows from them that actually paying in cash promotes saving. How is this possible?
According to psychologists, there is a mechanism of discomfort that we feel when we part with physical money. The view of the banknote file that goes to the cash register gives us almost physical pain. Effect? Subconsciously, we try to avoid such unpleasantness – we are therefore more inclined to save and we are much more careful about the sense of making a specific purchase decision.
A simple example: I only have 100 zlotys in my wallet and I did not take the card. Usually, however, I spend about $ 200 for weekly grocery shopping. What am I doing? I set priorities. I give up on various stuffers, focusing only on what I really need. Everything to fit in the limit. I have already mentioned this mechanism in the article on how to save on grocery shopping.
Let us return to the study of American psychologists. One of its elements was a test, which was subjected to 28 people. Each of them received a detailed shopping list. In the first stage, the extras paid a $ 50 voucher. Later they received a 50-dollar banknote. As it turned out? Paying with a voucher they spent more than cash – they chose more expensive products. Interesting, right?
The payment card promotes extravagance
It is obvious that without seeing how much shopping really cost us, we are willing to spend much more on it. This is especially evident when paying by credit card. Here, not only that we operate virtual money, but the consequences of its release are postponed. A credit card is a good solution, but only for people who can impose financial discipline on their own. Otherwise, problems will arise.
Hence the conclusion that if we have difficulties with a reasonable management of the household budget, it is worth using cash more or even just based on it. Thanks to this, we can see exactly how much we actually spend and literally feel the importance of such a purchase. Here we come to the heart of my article. It’s time to explain what the envelope method is.
Hold the money in the envelope and you will live cheaper
The envelope method, as you can easily guess, consists in holding the cash in an envelope, or rather in a few envelopes. It is such an old-fashioned equivalent of sub-accounts. Each household has specific expenditure groups:
- Grocery shopping
The envelope method is about the means to finance these things in dedicated envelopes. And so: we create a separate envelope for bills, separate for grocery shopping, separate for culture and other entertainment, separate for expenses related to the operation of the car, etc.
The question is, how do I know how much money I will need to meet all these needs? Here you need to be based on experience. You can simply track the movements on your account and write down the scale of spending on the categories. If the average of the last six months shows that, for example, I spend 200 $ a month for fuel, this amount should be in a separate envelope.
Why all this? To spend less – according to the mechanism I described earlier. The implementation of this solution is quite troublesome, because let’s face it – paying with a card is much more convenient. However, you can break and at least try to manage the budget based on the envelope method. It’s Friday, which is the day of weekly shopping. Instead of taking my wallet with the cards, I only take an envelope with the amount deducted and I must, of course, fit in this limit.
Simpler way to use the envelope method
I wondered how I would actually be able to function with all these envelopes. I imagined a very real situation when, for example, I go to grocery shopping, but when filling the basket I remember that the toilet liquid has run out. And what? Should I go home to get an envelope with the word “Chemistry”? It would be at least strange, and certainly not practical.
Hence, I came to the conclusion that it would be wise to slightly modify the envelope method and simply keep one envelope of money for a month-long household maintenance – a separate envelope could be used for bills. In this way, I would not feel discomfort during shopping (that I might run out of money).
Will I switch to paying in cash?
I will be honest with you: no. And I have specific reasons for this. Here they are:
I can not imagine holding a lot of cash at home – it’s simply not a safe solution;
I can always withdraw cash at an ATM, unless there is a failure, but it is a purely hypothetical scenario;
I’ve got used to paying with a card (actually it’s mainly a smartphone), I’m also testing other solutions – even Revolut, so it would be very difficult for me to go through such an archaic solution;
I can manage my home budget without these envelope tricks – everyone can use public financial management programs that are more convenient and more accurate than envelopes;
In my opinion, paying only with cash in the long run makes it impossible to develop a saving strategy. It is difficult to save each payment, for example in a notebook. This method is conducive to reducing the cost of living, but does not force you to reflect on the structure of your expenses;
I can not imagine paying all the bills in cash – I really do not have the time or inclination to run to the post office with any payment;
I treat the envelope method only in terms of the curiosity. However, this does not change the fact that such a solution can be very helpful for people who completely lack control over their expenses and need solid training with reasonable budget management.