Envelope Budgeting System – How it works and why you should do it

Envelope Budgeting System
How it works and why you should do it

Advantages of Using the Envelope System

It keeps your budget on track
It helps you avoid overspending
It forces discipline
It helps you avoid unnecessary spending

How the Envelope System Works

The envelope system is a way to track your budget by categorizing them in an envelope. This is only applicable to expenses such as coffee, lunch, snacks, clothing, entertainment, etc. Expenses that varies depending on your monthly spend.

The envelope system is a great way to keep you from overspending for each category. It will help you stick to your budget.

1. Determine your budget

Before starting the envelope system, determine first how much money you have left after paying all your bills and putting money aside for savings/investments.

You can read on Budgeting That Works For You and start tracking your monthly budget.

2. Figure out the categories that needs a cash envelope

Think of which categories that will most likely need a cash envelope. Which expenses are busting your budget?

Here are a few categories to get you started:

Groceries
Restaurants
Household Items
Entertainment
Gas
Clothing
Gifts
Haircare/Makeup

3. Figure out your budget for each category

After determining how much money you have left, you can then divide them among the categories you have chosen to spend money to. Make sure that the amount is reasonable for each category. Our goal is to stick to our budget, and we don’t want to borrow money from another envelope. Carefully planning your budget based on your past spending is crucial in determining how much money you should allot to each category.

4. Create / Buy an Envelope and Fill them with the Budgeted Amount

You can buy a regular envelope, or you can create your own. You can my customized budget envelope here.

Make sure that you label each envelope, so you don’t mix them up. Write down the starting balance and expenses as well so that you can keep track of how much money you have and have spent. My envelopes are designed that way so make sure to check it out.

Fill them with cash! It may seem inconvenient to carry around envelopes with cash but think about the outcome and the advantages it will bring you.

5. Spend only the amount you have in your envelope

This is the hardest part of the process. Discipline and motivation are important. You must stick to the budget and the system. If you run out of budget for a certain category, then you must wait for the next pay period. Therefore, it’s important to carefully plan the budget beforehand.

Sometimes, it’s unavoidable that you run out of budget for a certain category. If this happens, it’s okay to borrow money from another envelope but remember the consequences. If you run out of budget for groceries, you can try to take out money from the “Clothing” category – but the consequence is that your budget for clothing is used up and therefore you can no longer buy a new clothing. It’s important that you know your priorities well. Think about which categories you can sacrifice to make up for a more important category.

6. Roll-over or save it

If you have leftover money at the end of the month – Congratulations! You can decide whether to roll over the money left to the next month or add it to your savings.

You can also reward yourself – but within reason. You worked hard for it, so you deserve it!

What if I pay some of my expenses online?

A good trick would be to create a separate envelope labeled Online Purchases. Just remember to keep track of it by writing them down.

Take out a cash from the envelope of the category you made a purchase to and pay it to the “Online Purchases” envelope. At the end of the month, you can then put back the money back to your account.