Spending money used to be a topic of anxiety in my house. When I started on my journey to Financial Freedom around 5 years ago, I knew I wanted to be free, but I didn’t really know how to get there. I hadn’t worked out the formula yet.
I knew I needed to save a whole load of money and so I tried to put my spending on complete lockdown - and failed!
You see – I like spending money. It allows me to do things that I like doing. It allows me to travel and have weekends away. It allows me to have amazing experiences and eat great food.
A lot is said about ‘buyers remorse’ and I used to suffer with this problem a lot.
I would run off to the shop to purchase the ‘next big thing’. I would run home all excited to open my ‘new toy’ and then very quickly that feeling would be replaced by a sinking sense of guilt at what I had just done.
The problem was that the buyers remorse used to last longer than the excitement of the new purchase. A lot longer in fact.
I have written before about the first mobile phone I bought using my dad’s credit card. It felt great to ‘have it now’, but when I was still paying it off 3 years later (having probably paid 3 times more than the phone was worth in interest) the guilt was intense.
I know a lot of people struggle with this problem. They let themselves make a big purchase or go out and book a big holiday, but then they feel guilty about it afterwards.
Should I have done that? Can I afford it? Perhaps I should take it back? These are all thoughts that can creep into your psyche after a big purchase has been made.
But it need not be this way. You just have to program your mind to think about money (and managing money) differently.
First of all, I believe that money is designed to be spent. It might seem strange to hear that, but money is a tool and it’s only purpose is to be spent at some point in time.
It is simply a tool that humans have invented to facilitate smooth transactions between us. It has no inherent value. I don’t believe it makes us happy on its own and you can’t take it with you when you die.
As such, money only has any use to human beings when we spend it on things that we need and want. Preferably on things that bring us joy and happiness.
We have a choice about when we spend our money. When we come into possession of some new money (say a monthly pay check) we can either spend it now or we can save it to spend later (notice how I said “save it to spend later” and not just “save it indefinitely”).
If we do opt to save money for later, I believe that there should be a point in the future when we plan to spend that money – otherwise, why save it in the first place?
Because other people want to spend money now that they don’t have (i.e. borrow money), if you save money to spend later you also get rewarded in the interim period with interest, dividends or growth.
Once we have gotten comfortable using money for what it was intended (as a tool) it becomes far easier to apply the next step in good financial management.
That step is effective budgeting. Namely envelope budgeting!
Most people really struggle with budgeting and I think that is because most budgeting systems are not designed for ‘normal’ human beings.
‘Normal’ human beings are not very disciplined or rational creatures. We do stupid things sometimes because it makes us feel good in the moment. We make illogical decisions based on our emotions and misconceptions rather than based on logic and facts.
Most budgeting systems rely on us tracking what we spend and then having the discipline to reduce that figure in future months. The problem with human beings is what Mike Michalowicz calls the ‘big plate’ problem.
You see, if humans are given a big plate to eat off, we tend to fill it with food. We make use of the space available on the big plate and then we also tend to eat all of the food that we place on the plate.
It is pretty obvious that when given a smaller plate, we will tend to put less food on it – there simply isn’t room for more.
What is interesting though is that we don’t tend to come back for more food because we are still hungry. The brain has seen a full plate of food (even though the plate was smaller to begin with) get eaten and so the assumption is that we must be full.
The same applies to money.
If you allow yourself to eat from (spend from) a big plate of food (a single bank account with all of your money in it) human nature is to eat (spend) what is there – i.e. all of it.
If however, you serve your food (money) from smaller plates (bank accounts or ‘envelopes’) then human nature is to only eat (spend) what is on the plate in front of us.
If you have stuck with me through that analogy then well done!
This concept of ‘smaller plates’ is exactly how envelope budgeting works.
Usually when we get paid, we put all of that money into a single bank account. That money gets spent throughout the month in a less-than-organised way and then you arrive at the end of the month with (usually) not much left. This is just human nature in action – you have put all your money onto a big plate and eaten it all.
Envelope budgeting works by forcing us to serve our money onto smaller plates when we first get it. If we have a smaller plate to eat from, we tend to eat less food – it is as simple as that.
Let’s use a simple example.
Let’s say that you earn $2000 per month and all of this money goes into a single bank account. At the beginning of the month your fixed bills and expenses get paid. You go and buy food, you eat out a couple of times, you go to the cinema and then buy a birthday present for your friend. Throw in a couple of unplanned expenses (there are always a few of those) and that impromptu night out and you are left at the end of the month with not a lot.
With envelope budgeting however, things work slightly differently. With envelope budgeting, when you get your $2,000 pay check, you immediately serve this money onto smaller plates or ‘envelopes’.
Some people do this with multiple bank accounts (not too many though and make sure you are not being charged for each one), however nowadays; you can do this with an app.
As an example you might have an envelope for your rent and other household expenses, another envelope for your food and groceries and another for fun. Most importantly, you should make sure you have an envelope for savings and investments and this envelope should be filled first – before all others!
Envelope budgeting can be a little tricky to get started with – but it’s really quite simple. Once you get started you won’t look back!
With envelope budgeting, when you get your $2,000 pay check, you might put $400 into savings and investments first. Then you allocate $800 for rent and household bills, $500 for food and groceries and then you have $300 left over to put in the fun money envelope.
(Note that these figures are just for illustration purposes – they are not designed to show how you should structure your monthly budget)
That fun money envelope is the reason I now feel great when I spend money on something for me!
Each month, I allocate money into my fun money envelope. I can spend this money in the moment or accumulate it for something bigger in future months. Whenever I spend it though, I can feel good about it because that money was designed for having fun!
All of my other bills and expenses have been taken care of (including my savings and investments) and my finances are on track – leaving me to enjoy my fun money however I want – guilt free!
If you would like to know more about envelope budgeting, you can read this post on how the system works.
You can also download my done-for-you budget planner to help you get started right away. Just click the link here.