International Baccalaureate (IB) Practice Exam

The envelope system is effective for managing spending in which context?

1. Fixed monthly expenses

2. Things that don't have fixed monthly expenses

3. All types of expenses

4. Business expenses

The correct answer is: Things that don't have fixed monthly expenses

The envelope system is particularly effective for managing spending in contexts where expenses do not have a fixed monthly amount. This system involves allocating specific amounts of cash for different spending categories and placing that cash into envelopes designated for each category. When the cash is gone, no more spending can occur in that category for the period, promoting conscious spending and limiting impulse purchases. For irregular or variable expenses, which can fluctuate widely from month to month, the envelope system allows individuals to set aside money in advance, helping them to remain within their established budget. Categories could include things like entertainment, dining out, or groceries, which often vary in cost day-to-day. In contrast, fixed monthly expenses—such as rent or mortgage payments—are typically predictable and can be easily managed through regular budgeting without the need for the envelope system. Similarly, although it can be used for all types of expenses, the envelope system is not specifically crafted for business expenses, which often require a different approach to managing finances, particularly concerning revenue tracking and expense reporting.