What is the Envelope Budget Method?

The Envelope System of Budgeting

The Envelope System of BudgetingThe envelope budgeting system is becoming a very popular method for people to budget their income in a very visual way. Essentially, the envelope method is as simple as it sounds. Back in the old days, people used to dedicate separate envelopes for different reasons they wanted to save money, such as vacations, groceries, utilities, gifts, etc…

Each time a paycheck would come into the house, the cash money would be divided up into each envelope. What’s in each envelope is money now dedicated for that purpose. For instance, a trip to the grocery store would only allow the amount of money in that envelope to be spent for that purpose.

So how do you get started with the envelope method?

Budget Your Income
The envelope system works best for people who have the same steady pay from check to check. Variable incomes do not work as well with this method. Take your income amount and start tracking your expenses for at least 30 days. Then work out how much you are spending versus how much your are bringing in each month. A budget must be created to get a very clear picture of what you earn, what you spend, and how you can change your habits to save more cash.

Divide The Spending Categories
This step essentially means you need to create and label your envelopes. Use any category you can think of and refer to your expense tracking sheet you did in the previous month for category ideas. Make sure to include one for emergency expenses to help cover those bills you are not able to account for on a daily basis that doesn’t really adhere to a certain category.

Start Stuffing
When you have your budget in place and your categories set up, you need to start filling the envelopes with your cash. If, according to your budget, you have alloted $200 to your monthly grocery bill and you get paid bi-weekly, you know you will need to put $100 each paycheck into your grocery envelope.

Say Goodbye
When the money in the envelope is gone, consider it gone for good. Once you have spent the allotted cash, you’ll need to wait for the next refill before you can buy again. You can not go to the ATM for extra cash or steal from other envelopes. Don’t use credit cards or borrow money from others. This really helps people to learn how to control their spending and helps create a clearer line between wants and needs.

Stay Strong
The envelope system will not magically begin working overnight. It will take time and commitment in order for you to get on track and really see the benefits of the envelope money management system. Once you start ingraining the method into your daily life, it will get easier. You will also gain confidence as you see your money and your savings grow over time.