How To Budget Using The Envelope Budgeting Method

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Financial management is one of the most essential skills needed for you to thrive. Whether you are rich or simply trying to get your finances together, if you are unable to manage your income efficiently, you’ll keep struggling.

The envelope budgeting method is a reliable strategy that can help you stay on track with your finances. By using this method to budget your income every month, you’ll be able to save money and make better buying decisions.

The essence of this post is to provide insight into how the envelope budgeting method works and how to use it effectively step by step. Interestingly, this budget method may be the perfect solution you need to curb overspending and reach your money goals quicker since that’s the major purpose it serves.

 

What Is Envelope Budgeting?

Envelope budgeting is a financial strategy that entails keeping money in separate envelopes for all your various spending categories. It’s a very practical method for building a household budget, tracking your spending, and of course, saving money.

 

Who Does The Envelope Budgeting Method Work For?

The envelope budgeting method works for people who want to keep their spending under control and also monitor all their expenses at the end of every month. If you aren’t earning a lot of money and would like to spend cautiously, this is the ideal budget method for you.

Since you make purchases with only the cash you’ve assigned to each envelope, your spending becomes rigid, making it quite difficult to indulge in impulse buying. This is an effective strategy that will help you develop good money habits, especially when it comes to spending.

 

Why Is The Envelope Budget Important

Growing up as a teenager, I watched how my dad struggled with his finances. He found it difficult to pay bills on time, let alone afford luxury for the family. Although his income was low, one reason for his financial setback was that he never budgeted his salary.

As I became an adult and started learning how to manage money, I quickly understood the important role the envelope budget method plays.

Using this strategy to budget money allows you to hold yourself accountable for every purchase you make. Since it compels you to spend mostly in cash, you’ll be reluctant to spend recklessly. This is because you know that as soon as you exhaust the money in a particular envelope, you’ll be unable to cover any more expenses in that spending category. Apparently, you won’t need anyone to tell you to be reasonable with your purchases.

More importantly, you should consider using the envelope budgeting method if you prefer doing things the old-fashioned way. You don’t have to rely on any fancy technology to track your spending. Besides, this would reduce or prevent frequent online shopping.

envelope budgeting method

 

How The Envelope Budget Method Works – With Examples

The envelope budget system is a cash-based approach to spending. It encourages you to make almost all your purchases throughout the month using physical cash. Now, this method works in a very simple and realistic way. Thankfully, you will understand better with the hypothetical example here.

Let’s assume your total income in a month is $5,200. The first thing you do is list out all your bills and put them in categories. For instance, you can have a category for grocery shopping. You can have another category for utilities, another for rent, transportation, and so on.

Now, each category should have an estimated total amount on it – that is the amount of money enough to cover all the spending in that category.

Now, bring out an envelope for each category and put the right amount of money in every one of them. That’s exactly how the envelope budgeting method works. It’s your responsibility to spend cautiously, so you don’t max out a spending category before your next paycheck comes.

 

How To Use The Envelope Budget Method

Now that you are ready to employ this budget strategy in your finances, here’s the step-by-step process to guide you:

 

Step 1: Calculate Your Monthly Income

The first place to begin is by adding up your monthly income. We all have different income streams. Some people work multiple jobs while some people run side businesses.

If you are a single mother, you are probably getting child support every month despite having your own income. Basically, you have to calculate your total earnings and figure how much you have after taxes.

Envelope budgeting is for people who can specifically track their income and spend it reasonably. Besides, in a situation where you have variable income, you can examine the previous months to give yourself an estimate of what you’d earn on average.

 

Step 2: Create Different Budget Categories

This is where the envelope budgeting method gets practical. You have to organize your expenses in various categories so it can be easy for you to track.

In some cases, you may not include fixed expenses like rent or debt payments. Since they already represent a fixed part of your budget, you don’t have to worry about overspending in such categories.

You should only be more concerned about expenses that vary based on your day-to-day experience and decisions. They include:

  • Groceries
  • Dining out
  • Transportation
  • Entertainment
  • Personal care
  • Pet care
  • Gifts
  • Household items
  • Clothing

So after covering your fixed bills, what is left can be budgeted for these variable expenses using the envelope strategy.

 

Step 3: Assign Budget Amounts To Each Envelope

envelope budget method

This is often considered the most important aspect of the cash envelope system. By the time you have listed your various spending categories, you must determine how much you want to assign to each category.

Mind you, an “envelope” is meant to represent a spending category as it holds the specific amount needed to cover that expenditure for the month. At the end of this step, you should have an arrangement that looks like this:

  • Groceries: $550
  • Gas: $179
  • Clothing: $160
  • Dining out: $250
  • Entertainment: $328
  • Personal care: $73
  • Miscellaneous: $83

Moreover, it’s important to be realistic when assigning money to each spending category. As much as you want to curb your spending, make sure each envelope contains enough money to cover the expenses. This way, you won’t be under any form of pressure to stick to the budget.

As long as you don’t live beyond your means, the envelope budgeting method will work out just fine.

 

Step 4: Spend The Cash In An Envelope

Now that you have assigned cash to each envelope, it’s time to start spending within the budget. Whenever you take cash from an envelope, subtract the amount from the total balance.

For example, if you spend $20 to fuel your car, write it down and figure out how much you have left in the envelope. This is actually a practical way to monitor your spending.

If you want to stick to this budget method, you must spend based on the amount of money you have on hand. If you have a budget of just $550 for groceries in a month, then you shouldn’t spend more than $137 every week. If you exhaust the money earlier, you won’t have anything else to spend except you want to resort to using a credit card which already defeats the purpose of building an envelope budget.

 

Advantages And Disadvantages Of Envelope Budgeting

The envelope budgeting method is a brilliant way to manage your finances. However, it might not always work out as the perfect strategy because everyone has a different financial situation. People also have different habits when it comes to managing money. Hence, here are the advantages and disadvantages of envelope budgeting:

Pros

  • Helps To Save Money

One of the primary reasons you should learn how to create a cash envelope budget is that it enables you to save money effectively.

Bear in mind that the only way you can conveniently stash some cash in a savings account is when you have covered your expenses and have extra money left. This means that you have to figure out a way to keep your spending moderate and live within your means if you want to reach your savings goals.

Fortunately, the cash envelope system helps you to achieve just that. By saving consistently, you can prepare for emergencies, pay your children’s education costs, and even build a retirement fund.

 

  • Curbs Spending

Usually, I find it easier to reduce my spending when shopping with cash instead of a debit card. By simply trying not to completely spend all the dollar bills I have in my wallet, I’m compelled to buy things carefully.

Now the envelope budgeting method supports cash-only purchases. Each time you take out money from one of the envelopes, you can see what you have left. This means you’ll naturally be encouraged to be reasonable with your purchases. If you are going to make a big purchase, then you have to plan for it.

 

  • Helps You Track Your Expenses

One of the ways to improve your financial situation and make better money decisions is by tracking your spending. This is totally possible when you budget using the envelope system.

After making a purchase, you are meant to write it down and calculate how much you have left in that spending category. If you suddenly use up all the money in an envelope, you don’t have to wrack your brain, trying to figure out the things you spent your hard-earned money on.

Since you’ve been keeping a record of your spending, it’s easier to tell where your money went.

 

Cons

  • Time-Consuming And Tedious

Creating an envelope budget method can take a good amount of time and effort. This is because you have to carefully calculate your bills and determine how much goes into each spending category. Don’t forget you have to keep physical cash in envelopes.

Unlike shopping with a credit or debit card, this can be a little bit stressful. Besides, it’s not very safe. Carrying a substantial amount of money can be risky. You could misplace it or it could get stolen. Unfortunately, there’s no way to get back your money if this happens.

 

  • Remains A Low-Tech Method

Making electronic transactions is very difficult when using this budgeting method. If you are used to shopping online or buying things with your credit card, switching to a low-tech method can be a little bit frustrating.

The cash envelope system works well for folks who are comfortable with cash-based purchases in order to curb spending. Perhaps you may find it convenient after sticking to the method for a couple of months. Otherwise, you can get a budgeting app that offers a digital representation of the envelope budgeting method and also makes it very seamless for you to make payments.

 

  • Rigid Spending

Not everyone thinks it’s ideal to have their spending restricted, especially when they have fluctuating expenses. But that’s exactly what the envelope budgeting method does. It curbs your spending by restricting you to the cash you have set aside in an envelope.

So even when you exhaust that money, the rule of the budget strategy doesn’t allow you to withdraw from another source or maybe use a debit or credit card. You’ll have to pause your spending in that category until you prepare another budget. This rigidity in spending is one reason you may not want to commit to this method.

However, if you are used to no-spend challenges and want to adopt a frugal lifestyle, then this won’t be much of a big deal for you. You’ll get used to it over time.

 

Recap: How To Budget Using The Envelope Method

Following the envelope budgeting example briefly examined in this post, you can see how straightforward it is to manage your money and control your expenses. Despite its simplicity, this budget strategy might just be the effective solution to bad money habits like impulse buying and reluctance to save.

Budgeting your income with the envelope system over a while helps you to develop financial discipline and wise spending habits.

 

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Author: Anthony Ihz

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