From time to time I hear people talking about envelope budgeting. Some tout it as the most popular and easiest to use budget model, similar to the bucket budget. However, I’m not so sure I agree. In fact, there are many disadvantages that you face when trying to execute this type of budget.
And in case you don’t know what the envelope budget is, here is part of a post from another blog that describes how it works:
Getting to know this type of budgeting is not really complicated, as its name already gives away a big clue. Envelope budgeting has earned its title because it basically needs envelopes to be done. And they are not some sort of special envelopes that you need to order from a specific distributor, they are just the ordinary envelopes that you get to see every time. So, what are these envelopes for and how can they really contribute for monetary planning?
When you decide to do envelope budgeting, you start off with the same things you have to do with other budgeting methods: you gather your financial data. List everything in your life that has something to do with money. Start off with your regular income, how much do you make monthly or yearly? Then write down your basic expenses such as your house bills, taxes, mortgages, food and transportation allowance. Then move on to your additional expenses such as those that you spend when you go watch a movie, you buy a new-shirt, etc.
The next step will be that you get envelopes and then label each of then with every one of these expenses. And along with the label, put your allocated budget. Now, all your have to do is put the corresponding amounts in each of these envelopes. And you will not be able to touch the money in these envelopes except for their original purpose….
More at Envelope Budgeting – Understanding the Most Popular Budgeting Method
At first glance, this type of budget seems pretty forward and simple right? I mean you put away money in a bunch of envelopes and then only use money from the envelope to cover each of your expenses. While this concept probably worked well twenty years ago, I just can’t see it happening with all of the digital transactions that are used nowadays.
I mean, when was the last time you paid your mortgage, car payment or insurance in cash, or even with a check? I guess you could still pay those expenses separately and keep an envelope for your entertainment, dining out and other daily expenses. It may work, although ask yourself again, when was the last time you paid cash at a restaurant, gas station or even at a movie theater?
The second reason I don’t think an envelope budget would work anymore is because who is going to carry around those envelopes anyway? Let’s say you’re at the mall and decide to buy a snack but you forgot your envelope. Or you decided to go out with the guys after work but didn’t have the “entertainment” envelope handy. It just doesn’t seem like a method that would be easy to use. Maybe you could modify it and instead of using envelopes, you could have separate debit cards for different expenses, or perhaps have a wallet with separate compartments for each expense.
Anyway, I guess our takeaway here is that while some budgets, like the envelope budget, sound simple and easy to use, they are probably more appealing for their simplicity than they are for their usefulness.
Please tell us your thoughts on this subject.
