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(NewsNation) — If you’re looking for a new way to manage your finances for the new year, you might want to try envelope budgeting — also known as “cash stuffing.”
It might sound odd, but this concept has actually been around for years, according to NerdWallet. NerdWallet describes it as a budgeting method where people physically portion their monthly income into different spending categories using — you guessed it — envelopes.
What is envelope budgeting?
When using this system, people take envelopes, write down a specific expense like utilities or groceries on each one, and then put the money they plan to spend on these into the envelopes.
“What either makes or breaks a budget is the variable expenses. It’s the going out with friends here and there. … It’s all these little things that add up,” Carlos Moreno, a financial specialist and coordinator of the Mobility Mentoring Center at Economic Mobility Pathways, told NerdWallet. “That’s where the envelope system is so effective. It shows you right then and there how much money is going into specific categories.”
How to start envelope budgeting
To begin, CapitolOne suggests figuring out your total monthly income, including what money is coming in, such as from your job(s), investments, alimony or child support payments.
Then, set your spending categories. Keep in mind routine bills like rent, entertainment or personal savings. These are the categories you’ll write down on the envelope.
After that, pick the dollar amount you want to spend in each of these categories and write it down. If you don’t know how much to allocate, CapitolOne says it might be helpful to look at past bank statements.
Once you get paid, you can withdraw cash from your bank and divide it up into these envelopes.
“When you’ve used all the money from an envelope, the idea is to avoid spending any more in that category until the envelope is replenished with more cash,” CapitolOne said. If there’s any leftover in an envelope before your next paycheck, you can save that as well.
What are the pros and cons?
As Chase Bank points out, actually taking the cash from the envelope can be a reminder that you’re spending money — making it easier to stay within budget.
In addition, since this doesn’t involve a bank, you won’t have to worry about overdraft fees from debit cards, or racking up credit card debt.
At the same time, envelopes, or recently withdrawn cash, can be lost or stolen. Starting the process can be time-consuming.
“The envelope system can help new budgeters and impulsive spenders,” NerdWalllet writes. “It lets you set goals and gauge how much you spend and save. We recommend this method to people who want to take charge of their finances in a hands-on way.”