Next up in our #WaysToSave series looks into the envelope system for saving that involves allocating your spending by category – such as groceries, clothes, meals out – each with its own “envelope”.
The idea is simple, at the start of the month you set time aside to put your money into your envelopes for the month based on the categorise you’ve set. Once the envelope is empty, you can’t spend more.
The method is great if you’re trying to limit your spending as it heightens your awareness about what you’re spending your money on. There are lots of blog posts about how to live by the envelopes, some requiring using actually physical envelopes to store cash (boooo! 👎) and others using more digital means.
Fancy giving the envelopes saving strategy a go? Get yourself set by following three simple steps:
Step 1: Calculate your essential monthly expenses
What we are talking about here are tallying up your essentials and subtracting them from your income. By essentials we are talking about rent/mortgage payments, utilities, phone bills, debt repayments etc that you need to survive.
So if your salary is £2,000 and your essentials at £1,000 you are left with £1,000 to allocate to your envelopes and ultimately spend.
Quo Money will do this for you automatically with its activities feature that automatically works out what comes in and out of your account each and every month. Once its analyse your transactions it then maps this forward 12 months so you can see how your bank balance will change overtime.
Step 2: Create your spending categories
Next step is to take what you’ve got left to spend and split them into categories based on things that you like to spend money on like eating out, buying clothes, treating others. You can literally create as many of these categories as you like.
Once these are set, take the amount that you’ve got left to spend and seperate it into each of your envelopes. The idea is simple, when your money is gone from an envelope, you can no longer spend on that item until next month.
Quo Money automatically categories your transactions to one of twelve different categories as well as letting you create your own if you wish making it even easier to keep a track of specific spending types.
Step 3: Withdraw money and put it into envelopes
Here’s the bit we don’t like about envelopes, it assumes that you manage cash. Unfortunately, if you are looking to save money, cash isn’t a great thing, plus you can’t get an Uber with cash! It also means that you are subject to lose it – or even worse have it stolen.
At Quo Money we actually discourage the use of cash with cash withdrawals negatively affecting your financial fitness score. Instead we recommend using your mobile banking app like Monzo to set budgets being your metaphorical envelopes.
Once these three steps are set up you are good to wild with your money. Anything left over at the end of the month in your envelopes, why not save it, reducing your budget for the category in the following month?
Envelopes can be successful as it’s its grounded in human psychology, specifically the rule of loss aversion whereby the pain of losing something (your money) stops you wanting to spend.
As Quo Money develops we’ll look in place more features to allow you to live by these savings strategies. That said, we only want to create things our customers love, so if you love it or loathe it, we’d love to know so that we’re creating products that people love!