Back before credit cards, when we lived in a “cash-based” society, many households would handle their monthly budgets by literally putting cash in a series of envelopes. Labels on the envelopes might identify fixed expenses, like rent, utilities, groceries, and so on. When an envelope was empty, they knew they had no more money to spend on that category that month. In essence, that was a spending plan, and it was relatively easy to manage.
A more modern version is people with multiple bank accounts, each designated for a different expenditure. One might be for household expenses, another a holiday account, and maybe another a vacation account, and so on. In essence, this is the equivalent of “envelope accounting” – just with bigger envelopes.
Today, with credit cards, checking accounts, online payment options, and other alternatives to cash payments, keeping track of things is more of a challenge than physically counting cash in an envelope.
In short, it requires a greater awareness today to maintain one’s budget. A more proactive approach is needed. The solution is a spending plan, and it’s important to have one to help you achieve your goals.
A good spending plan allows you to take charge of your spending, to prevent money from slipping away unnoticed, and to integrate your larger financial goals with your day-to-day cash flow. My next blog will address how to create a spending plan.