Have you ever used the Envelopes System?

Have you ever tried using the ‘Envelopes’ system in an effort to have money available when your bills arrive?

Your grandmother may have used a similar system but with jam jars used to store money instead of envelopes. Whether it’s jam jars, envelopes or even bank accounts, this system has some merit but it actually requires you to spend way more time and effort on managing your money then you need to.

Here’s why.

If you set up an envelope to save up $1000 for next Christmas at the start of the year you would need to put $20 into that envelope each week. 50 weeks later you would have your $1,000 and would be all set to go Christmas shopping.

This graph shows what that would look like. You save up $1,000 and then you withdraw it at the end of the year to go shopping. You then start again.

A Christmas Club Account at the bank works on the same principle but it goes one step further by making it difficult for you to have access to the money during the year.

If you had success with that envelope you might decide to use a similar envelope to save up to pay your car’s registration. If that was $1000 a year you would be expecting to put $20 a week into that envelope as well. However if it’s due in the middle of the year you will have a problem if you are starting at the beginning of the year. It will look like this.

You would be $500 short when the registration was due!

To solve this problem you would actually need to place $40 a week into that envelope. Once you reach the middle of the year you could back that off to $20 a week but for the first six months you would have to put in twice the normal amount.

OR, to avoid having to put in the extra money each week the ‘Envelopes’ system requires you to lend money from one envelope to another if you hit problems like this. In this case you would write on the Christmas envelope that you lent $500 to the registration envelope in the middle of the year and at Christmas time you would write on the envelopes again to show that you had paid that money back.

Unfortunately you would have to do exactly the same thing again the next year.

A Spending Plan is actually like the envelope system in that you save money in advance to pay your bills and other expenses, but it is so much better because it puts everything into the one envelope!

So, in the example above where we had Christmas and Car Registration in two separate envelopes, below you can see what happens if you put them both into the one envelope.

Two lots of $20 a week saves up the $1000 required to pay the car registration in the middle of the year and come Christmas time it also provides $1000 for Christmas shopping.

Whether you have 2 or 102 expenses in your Spending Plan it works because they all help each other out. There is no money juggling and no writing on envelopes required. You may have a catch up period for the entire list of expenses, but it will be one amount for all expenses and for one time only and it won’t be twice the amount! The efficiency gained by combining all your envelopes into one big Spending Plan is incredible.

If you currently do not have a system in place to ensure you have money available to pay your bills when they are due you really need to do something about it now. Christmas is on the way and people tend to do crazy things with money at this time of the year. Get in control NOW before the silly season hits!

There is really no need to be going through the stress caused by financial pressure because you can’t pay your bills on time.

The other advantage in creating a Spending Plan like this is that you can actually identify when you have too much money in the account (Yes that IS possible).

E.g. If you deposited $50 a week into your envelope above instead of the $40 a week that is needed, every time you checked your account balance you would notice you were ahead of your target. How cool would it be if you could check your account balance at any time, compare it with your target for the day and know instantly that you have a surplus and how much that surplus is?

Time for change!

If you’re tired of playing the guessing game with your money or frustrated using the Envelopes system (or a variation of it) you need a Spending Plan instead. Not only will it give you the benefit I described above, you will find money starts popping up to pay all the bills you planned for on the day it is needed rather than the bill popping up long before you are ready.

That has got to reduce the levels of stress!

More info can be found at https://simplybudgets.com.au/spending-planner-software/

That’s all for now. Have a great day!
David Wright