The Envelope System Method of Budgeting
Whether you’re saving for a trip or just getting your bank account in order, budgeting is an important part of good financial hygiene. One of the most popular budgeting methods is the envelope system. However, despite being around for a long time, some people still understand how it works.
The envelope budget system is a simple yet effective way of saving money and budgeting expenses. Keep reading to find out if this is the right method for you:
What is the Envelope System?
The envelope method of budgeting divides your income into different spending categories by physically portioning it out. These portions are usually tucked away in envelopes, earning the method its name. “Enveloping” can also be done digitally through spreadsheets, budgeting apps, and other personal finance software.
The concept is simple: Divide your money into budget categories such as groceries, bills, and so on, place the amount of cash needed for each category into an envelope, and put it away. One must only spend what’s available in that envelope for that category’s bills or purchases.
If you’re constantly going overboard on the money you budget for specific categories, this system is a great way to keep track of how much you are using and what you have left. For example, if you’re going into your envelope for yet another take-out meal and find it empty, you’ll have no choice but to cook at home or look for other meal options.
How the Envelope System Works
The cash envelope system is as straightforward as they come. Here’s a step-by-step guide on how it works.
1. Select Your Spending Categories
The first thing to do is to set out your spending categories. Start by listing your basic expenses. Then, add on other items as needed. Think about everything you spend money on and add it to the relevant budget category if it’s not a category in itself. Make as many categories as you see fit. Keep in mind, though, the more categories you have, the more likely the envelope system will feel overwhelming.
An example list of categories could be:
- Eating out
- Pet Supplies
2. Set Spending Limits
Once you have your categories set, determine how much money goes into each. This will be your limit for the month. Be careful that the total amount does not exceed your monthly income, and remember to leave something for irregular or unexpected expenses.
If you are paid weekly or bi-monthly, divide the total amount for each category by the number of pay intervals you have each month.
3. Label Your Envelopes
Now that you have your categories and budgets outlined, you can label your envelopes. Write the name of each category on the envelopes. Some people like to include the monthly amount on the envelope, while others prefer to only include the category name—the choice is yours! However, knowing just how much you put inside can be a good reminder of how much you’re working with in each category.
4. Fill the Envelopes
Assuming you have already cashed out your paycheck, separate your funds by putting the allocated amount for each category into its respective envelope.
5. Spend Only What is in the Envelope
The most important part of the money envelope system is that you adhere to your limits. So if you put a specific amount of money in envelope category X, that is all you can spend that month. Do not pull cash from another envelope as that can throw your financial planning off course.
Advantages of The Envelope System
It’s easy to see why the envelope method is a popular system:
- Physically dividing up your money keeps you on track with your spending and lets you know how much you have available to spend.
- It makes it harder to overspend, which is great for avoiding debt and overdraft fees.
- Knowing how much you have to spend in a particular category enforces discipline. You can’t make an impulse purchase when the envelope is empty.
- The envelope system holds you accountable to your budget.
- It makes you more aware of your spending and how the little things can add up: the cash is visible, touchable, and instantly parts with you.
The Envelope System Disadvantages
In spite of all this, the system does have its disadvantages:
- Carrying large sums of cash and storing it at home puts you at risk of loss or theft.
- It can be inconvenient to make constant trips to the bank or ATM.
- Savings are more likely to be drawn from when they are available.
- The envelope method forces one to forfeit interest, rewards and offers that credit cards can offer.
Is the Envelope System Best for You?
The strength of envelope budgeting is that it forces you to set goals and stay in touch with how much you spend and save. If you are a person who looks at your bank account balance and wonders, “Where did my money go?!” then this system is definitely for you.
It also curbs impulsive spending because once the envelope is empty, you can’t spend from that category until the next paycheck. This means, no, you can’t have that cute pair of shoes or afford that extravagant outing with friends. If you usually let your heart make money decisions instead of your brain, implementing envelope budgeting is a viable financial solution.
Get Help Budgeting With CreditAssociates
When you get accustomed to the envelope method, putting money aside and sticking to it becomes easier. However, budgeting when you’re struggling to make credit card payments can be hard. If debt is getting in the way of your ability to budget, CreditAssociates’ debt relief program might just be for you. Contact us today to learn more about how we can help you take control of your finances.