Posted by Maneesh Sethi :: October 2, 2007 @ 11:04 am

Remember enveloping? Enveloping is a method of tracking your finances and creating a budget by putting all your money in envelopes at the beginning of the month. In doing so, you choose categories and spending limits for each of the categories. By putting money in each envelope at the beginning of the month, you know exactly how much you can spend during the month---if you reach into the envelope and nothing is left, you are done spending on that category for the month.

My plan was to break up my envelopes into necessary-money and fun-money. Necessary money was to be spent on things like rent, gas, and food, while fun money would be spent on eating at restaurants, going out, etc. For the first few days, it worked great---but eventually, I failed.

While I didn't overspend (being Indian, getting my miserly, misshapen hands to release a bill requires the jaws of steel), I was unable to follow the system. I continuously found myself grabbing my credit card to make purchases. Here were my big problems:

Not planning for online purchases - Although I didn't think about it, almost all of my purchases of non-essential things are online, thanks to Amazon Prime. I should have created a virtual envelope of money to spend on online purchases. The best way would be via a prepaid debit card. The way I will probably do it is by overpaying my credit card at the beginning of the month. At least with my card (which is issued by my bank), I can overpay my credit card such that I can spend any of that extra money without incurring credit card fees. If I overfund it at the beginning of the month, I know exactly how much money I have and I also don't have to worry about going over my credit card limit.

Not having cash in my wallet - The stupidest problem---I just forgot to put money in my wallet! When going out for a meal, I'd be forced to use my credit card.

Not planning ahead - I didn't plan ahead to have enough money for my daily expenses, and I didn't pigeonhole the money that was in my wallet--it was just a mix of money from several envelopes.

None of these problems were major in their own right. The main problem is that they added complexity--so much so that it changed my system of easy budgeting into a difficult method of tracking where I spent my cash.

When planning your own system of budgeting, we here at Lending Club urge you to account for potential failures of complexity---they will be the most heinous and the easiest to miss.

At some point you may need to make a purchase that you can’t budget for. In such cases, consider a P2P loan from Lending Club instead of using a credit card. These are installment loans with great rates, so you will have no trouble budgeting for the predictable monthly payments.