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And how often do you overshoot your grocery budget? How often do you spend more on clothing than you budgeted? Do you even budget for clothing?
You can ensure that you always have the money when you need it by saving regularly for recurring expenses. Simply use multiple savings accounts as tools to help organize your financial goals on a small scale. It is much easier to break down those large annual costs into monthly chunks!
For many years the cash envelope system has been implemented by families to manage different expenses. In today’s more digital and electronic world, many are finding the use of multiple savings accounts as an alternative method to the cash envelope system.
Here is how the envelope system works. You put the amount of cash into an envelope that you plan to spend on food. You don’t use your “food” envelope to buy anything but food; and you don’t buy food other than with cash from that envelope. If the food envelope has only $25 left with just three days before your next payday, you don’t go out to eat and spend $50 because you don’t have $50. You have $25. So fire open that fridge and force down those leftovers!
Repeat the above steps for each category in your budget. So you might have several envelopes with names such as “entertainment”, “dining out”, “gift buying”, “clothes”, etc. Later in this “Multiple Savings Accounts” series, we’ll discuss the different categories you may want to consider.
Multiple Savings Accounts
The electronic method of cash envelopes means using multiple savings accounts at your bank. You essentially fund separate savings accounts instead of envelopes. Then you transfer money from each separate account as money is spent from that category.
The key with both of the above budgeting methods is that you are limiting your spending. You are finding out money is finite. There is only so much of it. Despite what MasterCard and Visa tell you; when it’s gone, you don’t spend anymore. This doesn't mean you stop eating. You just eat food you already have in the cabinets. That’s a novel idea!
The same goes for entertainment. With cash envelopes or multiple savings accounts, you might choose an “entertainment” category. By entering an agreed-upon amount into the entertainment account (or envelope), you can now spend without guilt. As long as the money is spent on entertainment, it doesn't matter if you eat out at the fanciest restaurant in town, or go to 25 movies with your pre-set amount of money. That amount of money was already spent when you put it in the separate “entertainment” account.
This will keep you from overspending in different categories. It also helps you be prepared for irregular and unplanned expenses.
Our next posting will give you practical steps to implement multiple savings accounts with your personal finances. You won’t want to miss it!