The Envelope System
The Envelope System.
What is the Envelope System and how does it work? The Envelope System is a method of tracking how much you spend each month by category. You simply withdraw funds from your bank each pay period and place the cash in one envelope per category.
How Does This Work?
The first step is to determine what categories need an envelope.
The next step is to calculate how much to add to each envelope. For example, you may need $400/month for “Groceries”. You would take $200 per pay period and place the cash into your envelope labeled “Groceries”. Once that money is gone, you have reached your budget and must wait until the next week to replenish the funds.
The system is pretty simple. Start by only taking out the cash you will need for the pay period (typically every 2 weeks). By the end of the two weeks, if you have extra cash you can choose what to do with it. You can put this money into the next week's budget, treat yourself to a movie, or place it into savings. This all depends on what Financial Goals you have set for yourself.
Benefits of the Envelope System.
By having the cash on hand, you notice how much you pay and how often you are paying for something, helping you reduce unnecessary purchases. This system enables you to only spend a finite amount on each category every two weeks. This will enable you to pay off credit card debt quicker as you will not be “piling on” additional charges every week. Reducing your credit card debt will also reduce the amount of interest you pay the bank annually. Did you know that carrying a $10,000 balance on credit cards with an average APR of 20% will cost you $2,000 per year?
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