Setting up a budget for managing your personal finances is advisable even when you’re doing well financially. Being disciplined about the way you spend money can make the difference between gaining and/or retaining wealth and living an endless financial struggle.
During lockdown, though, with many people having to make do on reduced income, discipline is everything. Knowing exactly how much you’re spending and exactly what you’re spending it on makes it much easier to keep track of your financial situation.
You may have heard of the ‘Envelope system’ for managing your budget before. It’s a fairly old-school method, but a very effective tool for keeping tabs on your spending.
This is how it works:
Start by drawing up a list of all your monthly income and expenses and sorting all of your household expenses into categories. Label an envelope for each category (groceries, entertainment, fuel, birthday gifts, etc).
Next, decide how much money you’re going to allocate to each category for the month and, as soon as you get paid, withdraw the appropriate amount of cash for each envelope and put that amount into the relevant envelope.
Now, use only the amount that you’ve pre-allocated to each envelope for that particular item. So, if you’ve set aside R2 000 for groceries for the month, make sure that you don’t spend any more than that on groceries. It’s that simple.
Of course, this method requires a lot of self-discipline, since no-one is going to know if you borrow a bit of cash from your grocery envelope to pay for an extra take-away meal. But if you do that, you’re only cheating yourself. The beauty of this system is that it’s so simple, yet it forces you to pay attention to your spending and cut out any unnecessary extras. There are also certain psychological elements that come into play. For example, most of us will avoid breaking a large denomination bank note to purchase a small, non-essential item. We also tend to be more cautious when dealing with cash than we are when swiping a card.
For many, adjusting to this way of managing the monthly household budget takes a few months, but it’s a great place to start developing the necessary discipline to curb excessive spending and reduce debt. It can also be a useful tool for teaching young children how to manage their pocket money.