Improve Your Saving Stamina

The envelope method for the modern era

These days, of course, we rarely if ever handle cash - and your electricity provider might look askance at you if you try and pay your bill with a jar full of coins. Enter the modern envelope method. Here’s how to put it into practice.

1. Work out how much you need for all of your rent, bills and other non-negotiable by totalling them up over an entire year and dividing. If you get paid fortnightly, divide the annual total by 26. If you get paid monthly, divide by 12.

It’s important to work it out based on a year’s expenditure because many fixed expenses fluctuate significantly. Calculating your electricity bill based on the Dec-Feb quarter will mean a nasty shock come August! Putting aside the same amount every month provides certainty and makes it easier to budget for other things.

2. Designate one account to handle your bills, rent and any other non-negotiable expenses. If all of these are paid by bank transfer or Bpay, you may be able to look for an online-only account to handle this part. These are often fee-free.

Set up a direct debit for the monthly amount you calculated in the first step. This goes into the bills account. When bills come due, you won’t need to stress: the money will be there waiting for you.

Whatever is leftover is your savings and discretionary expenditure money. How much you budget to each of these categories is up to you.

3. Sock away the savings. Whatever you’ve chosen as your regular savings amount, you should set as a direct debit to come out on payday. This goes into a specialised savings account that doesn’t have a card attached. Bonus points if you can find one that penalises you for withdrawals. You want to make this money as hard to access as possible.

4. You’re now left with the expenses that need to be paid via card or cash, and which vary from month to month. Those might include groceries, clothing and entertainment. What you do here depends on your spending habits and particular weaknesses.

Some people choose to combine all of these expenses into one ‘envelope’, which gives them the flexibility to splurge on a night out and make up for it with a week of home brand pasta meals. Others separate them out into multiple accounts to better keep track of each type of spending. If you struggle a lot with impulse spending, you might even want to revert to old fashioned cash. There is a psychological impact attached to handing over real, tangible money. For some people that might be an effective curb to impulse spending.

This system may take you a little while to implement, but the cost savings are immense. You’ll also give your willpower muscle a much-needed break so you’re less likely to slip up.