Keeping within a budget is always difficult, and one of the most effective moves to make is to implement a cash envelope system.
Once a budget is established, a plan needs to be placed on how much money to leave in the bank for rent/mortgage payments, car payments or any other payments that will be paid out of the checking account.
Take the budget and a box of blank envelopes, and mark on each envelope the name of the line item and mark the amount that needs to go into that envelope. Sometimes it is helpful to also write down the exact denominations that need to go into the envelope so it is easier to distribute. Here is an example:
LAUNDRY - $33.00
(1 x $20, 1 x $10 and 3 x $1)
When payday comes, leave what needs to stay in the checking account so bills can be paid then withdraw the pre-determined denominations that to be placed in the cash envelopes as required.
There is a totally different mindset to spending money when cash is handed over. It doesn’t seem to hurt when a plastic card is handed to the clerk or the waiter, but when a fresh twenty dollar bill is given, it seems to hold a more intimate feel, one that is harder to give up than using plastic.
When cash envelopes are used – it makes it uncomplicated to know exactly what the financial status is at any time. Want to go out to dinner? Look in the envelope to see what is available to spend. As the money starts to dwindle and get used up, it is easier to say no to a desire to spend it. The need to hold on to the money a little longer seems to take hold of the spender.
This method is probably the single biggest game-changer on how money is spent on a monthly basis.