The envelope budgeting method utilizes a system of labeled envelopes in which you divide your take-home pay into various categories. While this is typically a cash-based method where you’ll have cash on hand to actually fill the envelopes, there are digital versions that create more of a virtual experience. In either situation, you’ll want to allocate your income to various spending categories and then limit your spending that month based on the amount you’ve put into each envelope. It’s a straightforward way of managing money.
Overview
The envelope budgeting method allows you to create a budget using visuals – with actual envelopes with cash in them – and allows for careful spending tracking. The biggest downside of this method is that it takes time to set up and manage on an ongoing basis, but those that use it find it very beneficial to see where their money is going each month.
You’ll portion out the specific amount you elect for each category. Here’s how to make it happen – all you need is the cash, envelopes, and a pencil.
Creating Budget Categories
Start by outlining all of your spending categories. Each envelope will get a specific category, such as:
- Rent
- Groceries
- Personal care
- Movies
- Credit card repayment
- Insurance
Do this for everything that you spend money on each month. Be as thorough as possible when creating envelopes. The more detailed you are about how much you are spending on various areas, the more accurate your budget is.
Figure Out Budget Amounts
You can use past transactions from your bank account or debit cards to help determine how much should be put into each category. Then, work through to create a budget. Generally, you’ll need to do a bit of work on paper first.
- Determine what your income is from all sources. That’s your budget that must include all of the expenses you list out.
- Calculate your fixed expenses, which should include rent, car payments, insurance, and loan payments – costs typically the same each month.
- Determine your variable expenses, such as groceries and gas payments; even some of your utilities may fit into this area.
- Evaluate your savings goals. Put aside a specific amount of money each month to go towards savings.
- Estimate your discretionary spending next, or costs you want to spend money on if you can afford it, such as coffee purchases, eating out, getting your nails done, or purchasing new clothing that’s not essential.
In total, the amount you put towards each of your expenses should be, at most, what your overall income is.
Fill Cash Envelopes
If you are using actual envelopes, you’ll need to cash out your paycheck to start stuffing them. On the outside of the envelope, write down the category, such as rent. Then, place that amount of money into the envelope based on your created budget. Do this for all of your expenses.
Put the amount of cash into each envelope based on your budget. Then, throughout the month, you know how much is left to spend when it comes time to make a purchase related to that category. You can only spend what’s in that category. For example, if you put $300 towards groceries and spend $100 the first week, you only have $200 more to spend on groceries for the month.
Advantages and Disadvantages
There are some advantages of the envelope system:
- It helps minimize the risk of overspending in any given category. You know exactly how much you have to spend in each category.
- For people who feel an emotional connection to their money, spending it is harder, which means you have to think twice about making a purchase. That could help you reduce spending overall.
There are a few disadvantages to keep in mind as well:
- It is hard to manage this month-to-month if you do not have the time to do so.
- You may not feel comfortable having large amounts of cash at home, even when organized like this. You also don’t get benefits from using a debit card, like cashback offers or protection from purchases.
Is the Envelope Budget Method Right for You?
The envelope method can be a beneficial tool for those who want to visualize their budgeting. Though it takes time, it can help to real in those who are spending outside of their budget otherwise and wish to be more responsible.