The primary reason most people don't budget is that most budgeting systems are simply too complicated. That's why the envelope budgeting system is so popular. I actually used this in college and lived 100% within my means JUST on student loans (no job).
All you need are a few plain envelopes, a pen or sharpie marker, and a small amount of time. That's it. The envelope budgeting system is so popular because it puts a hard cap on how much you can spend per month.
Is this a perfect budgeting system for you? Maybe so. Read on and I’ll teach you about the basics of the envelope budgeting system.
How Does the Envelope Budget System Work?
Here's how to set up your budgeting system with envelopes:
- First, look at your current income and spending. To do this, sum up your average income over a 3-month period. You want to know what you can expect to bring in, on average, each month. That's the maximum amount you'll want to spend.
- List out all your expenses for the same 3 month period. That includes your essential spending (food, gas, electricity) and your non-essential spending (entertainment). With these two lists, you get a picture of your average earning and spending per month.
- Next, examine precisely what you are spending money on. Find out your overspending items. Are you overspending each month on Starbucks lattes or eating out?
- Now that the numbers are ready, grab plain white envelopes and a pen. Begin labeling your envelopes with broad spending categories that cover what you spend money on each month.
While your categories will be unique to your own spending habits, here are a few ideas of general categories:
- Dining Out
- Hair Cuts/Beauty
- Now it's time to figure out how much you want to allot for each category. Write down your monthly budget for each category on each envelope.
- Once you've labeled envelopes for your spending categories, it’s time to head to the bank. Withdraw enough cash to put in each envelope. Each envelope’s cash amount should be equal to the amount you've budgeted.
Once you’ve stuffed your envelopes with cash, you’re ready to go. From here on, you'll only take money from an envelope if you are paying for something from that category. Your goal is to only spend the amount in each envelope for items in that category each month.
At some point, you may find that one of your envelopes runs out before payday. This serves as a reminder that you’ve overspent on that category. You take that experience to adjust your spending habits going forward.
If you find yourself running out of cash, then you might check out ways to make extra money.
Unless it's your first month, DO NOT take money from another envelope if you run out of money in one of your envelopes. The key to this system working is that you're aware of how much you have available for each category and you only spend that amount each month.
Pro's of The Envelope System
There are numerous benefits to the envelope budgeting system.
The first is focusing on cold, hard cash. This is especially important in a world where electronic payment is commonplace.
Often, folks will break their budget because of their credit spending. After all, credit cards make it easy to lose track of how much you’ve spent. Those charges are out of sight and out of mind.
Too Much Debt
If you have too much debt and you find yourself spreading your paycheck across too many payments, try consolidating your paying into one with a Super Loan.
The envelope method brings those charges back into a concrete form. Specifically, your envelope of cash is easy to count and appraise at any time. That way, you can manage your funds better and know on sight if you’ve gone overboard. You feel more in-control over your hard-earned money.
If you have a problem with “saving extra money”, then I recommend opening an online bank and set it up to auto-deposit so it's out of sight, out of mind. You can open a compound interest savings account with Axos and they pay interest on your interest on your interest. When you set this up on auto-pilot like a direct deposit, then you can easily set your goals for the year and having money set aside.
It also lets you rethink the unnecessary spending at the moment.
For example, if it's early in the month and you're about to drain the ‘Dining Out' envelope, you may rethink if you want to spend that money on this particular dining out experience or save it for maybe hanging out with friends at a restaurant in the next week or so.
Being able to see in real-time the money you have to spend makes you think harder about what you're spending money on day-by-day.
What's amazing is that many consumers show more of an attachment to physical money. In other words, you’re not as likely to spend as much if you physically handle the bills.
When you see the actual cash, instead of just holding a plastic card with an invisible limit, it forces you to think harder about that money going away.
Should You Use The Envelope System?
Of course, no budgeting system is perfect. The envelope method has its drawbacks, too. You’ll need to consider these before committing to it.
First off, carrying around cash is not everyone’s cup of tea. This is especially the case with a paper envelope. Along the same lines, paper envelopes are not exactly secure. As such, there is a real risk of losing one of your cash-filled envelopes.
Second, if you have too many bills, it's time to cancel unwanted subscriptions. You can use True Bill to track your spending and cancel subscriptions.
A quick fix for online bills: If you do find that you need to pay for some bills electronically, write down exactly what you've spent on the back of your envelope. Even if you're still needing to use credit cards for some bills, never spend more than you've budgeted in that category.
Third, use Bill Shark to negotiate lower bills. That will free up some cash that you can use to bump up any envelope budget. Bill Shark will negotiate bills and cancel subscriptions for you. Click here to create your free account.
Finally, there may be some hidden costs with this budget method. In fact, many ATMs and banks charge cash withdrawal fees. These small fees can add up, depending on how often you end up withdrawing cash.
Who Can Benefit from This System
This budget method is a perfect fit for those that prefer paying in cash. For them, this budget adds structure to know how much cash is going out each month.
This method can also be useful for folks who over-use their credit or debit cards. As noted above, this method focuses on physical cash. This allows you to better feel and see the effects of your spending and saving.
You may also be able to use this budgeting method with kids and young adults. These young people usually only have cash to spend. Using this method, they can learn to categorize their spending. This, in turn, can lead to smarter budgeting habits over time.
What Other Budget Methods Are There?
By now, you should understand the basics of the envelope budget system. You should also be able to see its numerous benefits and be able to compare them to this method’s potential drawbacks.
Don’t forget that there are other personal budgeting methods, too. The 50/30/20 method is a perfect companion to the envelope method, for example. Using these together can really help take your personal budget capabilities to the next level.
You may also try the Pay Yourself First Budget Method. This allows you to set aside money first in a savings account & budget the rest. Every month, you see your savings grow as a result of Pay Yourself First.
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