Question

It is one thing to prepare a personal budget; it is another thing to stick to it. Financial planners have suggested various mechanisms to provide support for enforcing personal budgets. One approach is called “envelope budgeting.”

Instructions

Do an Internet search on “envelope system money management” and then answer the following questions.

• a. Summarize the process of envelope budgeting.
• b. Evaluate whether you think you would benefit from envelope budgeting. What do you think are its strengths and weaknesses relative to your situation?

Please help me with this. Thank you!!!

Answer 1

The envelope method was used when we were using cash for paying bills compared to the present scenario of online payment. People will seperate different monthly mandatory bills like electricity bills, telephone bills into different envelope. In these envelopes cash are distributed such that monthly payment of the bills is made possible. Even in the current scenario certain software help us to follow this method which can create a systematic way of saving and spending.

The process is as follows.

1. Create categories and maximum allowed amount: Total amount alloted should not exeed your monthly income. Generally a fraction of monthly income.

2. Make clear labels in each Envelopes

3. Separate Funds: Based on the actual expense/ historical expense allocate funds into these different categories like telephone, automobile fund, home rent, entertainment etc.

4. Start using the fund from the envelope.

b)

Strengths:

1. The system is logical and safe and only depends on your commitment
2. The system can discipline you and reduces overspending on things.
3. Can be used as emergency fund: an emergency envelope can be used such that, when major emergency comes we can use it from that money.
4. The budget you create becomes Tangible and less risky.
5. Any important monthly payment by you will not be missed which will reduces extra expenses in terms of fines or penalty.

Weakness;

1. Difficult to get everyone on the family to follow the same approach: The system is better on an individual level.
2. Generally the method prefers you to have physical cash in hand which will not be convenient for many individual.
3. Starting trouble and difficulty to change the lifestyle: This method can impact your lifestyle and many wont be able to follow the same.
4. Benefits of other methods like advance payments , credit card payments etc wont be available.