Sticking to a budget can be hard. It is tempting when you’re out and about to just swipe your card to make a purchase you want, perhaps using money that is actually budgeted for bills, or worse money that you don’t even have. What makes it even harder is not being able to ‘visualize’ your budget in real life. This is where the envelope budget excels.
Actual Envelopes, Actual Cash
The cornerstone of envelope budgeting is physical cash and envelopes you can handle. This helps you visualize your budget and keeps you accountable to your budget. When you spend money, you physically need to take money out of an envelope and spend it. When the envelope is empty, spending in that category stops. If you deviate from your budget, you know exactly what you’re doing. There’s no ‘oops, I bought clothes because I thought I had more budgeted.’ When there’s no more budgeted for clothes, there’s no more money in the envelope to spend and the spending stops.
Making the Envelope Budget
If you don’t have a budget written up, do so now. Add up your income for the month. To keep things easier later on, if you get paid weekly or bi-weekly, only add up 4 weeks worth of pay for your monthly income. In a separate column, add up your expenses and savings for the month. Also include the expenses that don’t come every month. For example, if you pay $600 on car insurance every year, include $50 on your monthly budget. If your ‘outflows’ column is more than your income column, start trimming unnecessary expenses until your expenses and savings fit into your income.
Once you have your budget, get as many envelopes as expense categories in the budget that you created. On the front of each envelope, write an expense category from your budget so you have an envelope for each category. It would be helpful to ‘seed’ your envelopes with some cash to help buffer against irregular bills.
Using the Envelope Budget
Every time you get paid, convert your paycheck into cash. Put the exact amount of cash that you budgeted for category into the corresponding envelope. You may not get get paid monthly. If not, divide your expenses out by paycheck frequency. If you get paid weekly, put a quarter of your monthly budget into the envelopes. If you get paid biweekly, put half of what you budgeted.
When you are filling your envelopes, be sure to fill them in order of priority. Fill your bills and grocery envelopes first, saving your discretionary envelopes for last. This way, if for some reason your paycheck is less than expected, you have enough to cover the essentials.
If you are a budget purist, you never borrow or move cash from one envelope to another. Personally, however, I think it is perfectly acceptable to occasionally move money from a ‘want’ envelope to a ‘need’ envelope if the ‘need’ envelope falls short. It would be silly to leave cash sitting in your vacation envelope and not pay a utility payment that was higher than normal. However, if you find yourself doing this on a regular basis, then either your budget or your spending habits need to be adjusted to make sure that all your ‘need’ categories are sufficiently budgeted for. Your budget will always be a work in progress as your life changes and as you get a better grasp on your spending habits.
If you don’t want to keep all your money in cash (which is understandable), you can still use a form of envelope budgeting by creating virtual envelopes. One warning tho- depending on how you set up your virtual envelopes, doing things digitally can require a little more self-discipline! Depending on how tech-savvy you are, your options for setting up your virtual envelopes are limitless. The basic principle still stands- with every paycheck, you deposit the budgeted amounts into each category. Every time you have an expense, you deduct that expense from the appropriate category.
One method would be to set up separate bank accounts for each ‘envelope’. However, this method would only be practical if you had a smaller number of categories. You could keep ‘needs’ in one checking account, ‘wants’ in a separate checking account and emergency fund in a savings account. For more on this method, check out this post.
Perhaps the easiest option is using one of the many website and app options already designed precisely for this style of budgeting. Sites such as budgetease.com or mvelopes.com make envelope style budgeting easy by automating much of the process. I personally like mvelopes, Their easy-to-use app lets me check the levels in my envelopes on the go. I can check to see if I have anything left in my ‘fun’ envelope or ‘clothing’ envelope before I grab a coffee or buy a shirt.
Make your budget your own. Figure out what works for you. You may find it’s best to keep some digital envelopes and some physical envelopes. For example, you may want to deposit all your housing, car, and savings categories in bank accounts. Each payday, withdraw the appropriate amount of cash for your grocery and ‘fun’ categories. Another thing that I used for a while was gift cards. After each paycheck, I bought a gift card to my grocery store for my grocery budget. That way there was no temptation to use that money to go on a spending spree or to blow it all on restaurants.
I’ll keep on saying it- make your budget your own! Find what works for you and what doesn’t. Adapt and modify as your situation changes. Just keep focusing on the goal of budgeting- spending less than you earn, and building up adequate savings.
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.