Earlier this year, I wrote about adopting the envelope system to manage my finance. After more than 6 months, I think it’s about time to
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Better Visibility in Cash Flow
Lately, I was having a conversation with my friend whom diligently records his expenses daily. When I asked if he reviews his spending habits regularly, he said that he just have to make sure he does not overspend.
How will he know that he has overspent? Well, he does put aside a certain amount of money for each category. But the total sum of money he put aside does not add up to his take-home salary. So where are the rest of the money?
“It’s either in my savings account or they help to cover the categories that I have overspent.”
This was the same problem I faced when I was tracking my expenses. One common pitfall of using an expense tracking app is that it doesn’t give a very real sense of what has actually happened when you have overspent.
Every month, you will start your balance sheet fresh. When you overspend last month, it doesn’t show any implications in the next month. When you do not have the visibility into your cash flow, you might be hit by unexpected expenses very badly.
This is especially bad when we are hitting the age where many friends are tying knots and our family members might be falling sick more often.
By adopting the envelope system, I set goals for every dollar in my spending account. When I spend more than the allocated amount, this is what I will see:
The last column of the table indicates that I have to find S$1,085.95 in the future to cover this month’s debt. It’s harder to find any excuses to spend more than you can afford with this level of visibility.
Better Control Over Cash Flow
Since now I have a better visibility, I have better control over my cash flow. Essentially, it helps to tackle two more problems:
- I know which envelope to ‘transfer’ the money when I need to incur an unexpected expense. For instance, I forgot to budget for a friend’s wedding next month. Since I didn’t spend on games last month, I can transfer some money over to cover the red packet.
- I am forced to review my expenses on a monthly basis when the funds are running low in some categories.
The first three months of adopting this system are really hectic. I have to reallocate my money and adjust my budget frequently. The advantage is that I start to understand my spending habits better. Well, I get to know what are the items I’m willing to spend more too.
Now, I’m able to set up realistic goals to fund my future expenses (e.g. travel). This helps to reduce unnecessary spendings and overhead in planning.
But… No More Apps For Me
I started tracking my expenses since I was in university. When I was a student, everything was much simpler. I can track my expenses with a super simple Google Sheet.
Things tend to be more complicated when we become a working adult. Insurance, investment, tax
So I tried to look for a mobile app to ease the process. But free or paid, all the apps will end up in a corner collecting dust.
When something does not work, you need to find an alternative.
I shared that I was using YNAB to adopt this system. The app is one of the best personal finance apps but I feel that most of the functions that I used can be achieved by a custom-made Google Sheet.
Furthermore, the new YNAB does not roll over negative funds from the previous month. This is the feature that I really needed since I tend to plan-and-budget-later for all my personal travel trip.
So I created my own Google Sheet to adopt the same principles.
Every start of the month, I will allocate the money to each category. I have a separate tab to update my transactions. The transactions will automatically sum up and display on my balance sheet for individual categories.
The running total sums up the remaining amount from the previous month and the current month’s budget. Everything I save and spend become very clear on the spreadsheet.
I’m not sharing my spreadsheet for now as it requires a fair bit of customization to make it work perfectly. In the near future, I might develop an open-source web app and host it for free.
Adopting the envelope system helps me understand and adjust my spending habits.
Yes, I track my expenses but I have not been reviewing the outcome. I didn’t realize that I was spending more than what I expected myself to spend before I started this exercise.
I understand that it is very tedious to track every single transaction. If you are thrifty by nature, you might not need to reconcile your accounts so often. Otherwise, it’s always useful to have some visibilities of your personal finance.
If you are interested, you can download YNAB and try for 34-days. You might find out some interesting insights 🙂!