Posted by Maneesh Sethi :: August 11, 2007 @ 6:44 am

In an earlier post I spoke about a system for budgeting called enveloping. By putting all your money, broken down by specific categories, into different envelopes at the beginning of the month, you can easily account for your budget and make sure you don't overspend.

Have you been going out every weekend, while trying to avoid spending more than $200 a month doing so? Each weekend, grab cash from the appropriate envelope. The weekend that you reach into the envelope for money and find nothing left, don't go out. You've reached your max (this might happen on day 2 if you live near New York City). Or, even better, go out without spending money (this is impossible if you live near NYC).

Some people use one envelope for entertainment, one for eating, one for impressing the ladies (one of my friends literally keeps a wad of cash with him and pulls it out to show off—he is an idiot). My system is even simpler. I have two envelopes: one for necessary expenses, one for unnecessary expenses. I consider necessary expenses to be those that I must pay, such as rent, gas, etc. For unnecessary expenses, I grab some money out of the envelope if I want to go out to the movies or buy some whey protein to bulk up (to actually impress the ladies).

My system requires a lot of restraint because I have to make sure I never dip into my “necessary” envelope for an unnecessary expense. However, for simplicity, it beats any other system---I only need to choose from two envelopes, and my “necessary” envelope is already basically rationed at the beginning of the month.

Try using the envelope system for a month and see if it helps you better achieve your financial goals. You might find that by spending just a few minutes at the beginning of the month to decide how you will spend your money, you can afford more fun expenditures than you thought—not just fun, but guilt-free, too.

By the way, if you buy something online or with a credit card, that money counts, too. Take an equivalent amount of cash out of your envelope and hide it for next month. No cheating!