How The Envelope Budgeting System Can Stop You from Overspending

1 min read

Did you know, that shoppers can spend up to 100% more when using their credit cards to pay instead of cash?

In a study published by Drazen Prelec and Duncan Simester of MIT, they found out that shoppers were willing to pay up to 100% more when they were paying with a card.

Overspending is easier as there’s no immediate penalty for using a credit card.

Imagine that you went to a restaurant with your family with $100 in cash. You’d be careful with what you order so that you don’t run out of cash. If you can’t pay, you potentially face humiliation, harassment, and even punishment.

With credit card, there’s no risk of any of those. That safety net allows you to spend more than you originally budgeted for.

And that safety net affects your monthly budgeting as well. When you go to the grocery store, you end up purchasing stuff you don’t need or in more quantity than required.

Digital payment methods are like leaky holes in your personal finance bucket.

A cash based system can fix that hole.

That is where the envelope budgeting system comes in.

What’s the Envelope Budgeting System

The envelope budgeting system is the process of storing cash in a physical envelope for a very specific purpose. For example, you can keep $500 for your grocery payments for a month.

The system works in four steps.

  • Choose the categories that can be covered with cash payment. For example, grocery, fuel, etc. 
  • Decide, based on your monthly budget, how much you plan to spend on each of those categories.
  • Keep that exact amount in the envelope
  • Only spend from that envelope from that category

If you run out of money, that means you can’t spend anymore on that category. That fear of running out forces you to stay within budget.

It even makes you better at money management.

Benefits of Envelope Budgeting

You become more accountable

As you need to take cash out of an envelope, spending money becomes a conscious process.

You can see that the stack is getting thinner. That itself is enough to trigger an alarm.

You Stop Overspending

There’s no way to overspend if you stick to the rules.

When you are out of money, you have to stop. That takes the choice of overspending off the table.

You track money better

An envelope is usually made of paper.

You can just write down how much you are taking out and when. In that case, you are balancing the envelope with every transaction.

It’s very hard to lose track of money after that.

Final Thoughts

Just because a new behavior is advertised, you don’t have to adapt to that.

In recent times, banks have even launched credit cards in which you can just tap on a device and then money gets deducted.

Spending money has never been easier. But is earning money easy?

Your outflow can’t be faster than your inflow. It’s your duty to make spending at least as difficult as earning.

And you can do that with the envelope budgeting system.

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Kazi Mofrad Muntasir I am an MBA-educated Marketing & Strategic Insights professional with extensive experience in regular & digital marketing and business development, with a verifiable track record of achievements within the retail, and services sectors. I am a Medium top writer- writing on Personal Finance, Marketing Strategy, Growth Hacking, and Personal Branding.

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