The Effects of Enveloping

Posted by Maneesh Sethi :: January 15, 2008 @ 6:33 am

Remember the enveloping system? As I wrote in that article, "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."

I tried creating categories such as “Work,” “Car,” “Going Out,” etc., and I put money at the beginning of each month into each category's envelope. I eventually failed, but I also realized I never needed the enveloping system because I'm not an overspender. The enveloping system is designed to help people who always spend too much money and need to restrain themselves. For me, that was never an issue, but for many others, it is.

The Simple Dollar wrote an article about how an all-cash lifestyle can help you beat the habit of spending too much. In it, he mentions that a cash-based system is like a set of training wheels--it is useful to help you curb your desire to use a credit card, but you won't be able to use it forever. It becomes too difficult to maintain. Using cash only is a small step that you can use to rehabilitate yourself from spending too much, but you probably will need to use credit cards again in the future, just as a matter of necessity.

Enveloping is a great tool for you if you have three qualities:

1. You consistently overspend - If you always spend too much, an enveloping system can help you curb your spending by making you limit yourself to a specific amount each month.

2. You can force yourself to not cheat - You can't cheat even a little bit, or else enveloping won't help you---you'll still overspend and be in the habit of overspending. You have to be willing to force yourself to beat the habit of overspending.

3. You are willing to take notes on what you are spending - Taking notes and knowing exactly where your money goes is important because it will help you detect where your mistakes are made. If you take notes, you will begin to see patterns that you can correct to help solve your problem.

If you see these three qualities in yourself, consider enveloping as a way to curb your overspending habit. But when you do return to using credit cards, be sure to stay within your means. If you have some specific purchases you need to make, you might also want to check on your other options for obtaining financing or consolidating debt. If you have good credit and a healthy financial situation, you may be eligible for a person-to-person loan on Lending Club with a lower interest rate than you’re getting with your credit card.