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Many people grit their teeth just at the very thought of budgeting. And I can totally relate to that. Most especially when you have little money to work with, budgeting is definitely no fun, if not terrifying or anxiety-inducing.
However, not until we started budgeting did we get a better view of our finances and expenses, and learn exactly how much we can afford. Undeniably, a budget is one of the most essential pillars for a healthy financial life.
If you’re new to budgeting or just want to simplify your complex budget, the envelope budgeting system may just be the thing for you.
I love the envelope budgeting system because it makes you become more aware of your money and how much is left in your budget. Plus, seeing your money go stings more than using your credit/debit card when shopping.
While we don’t use envelope budgeting for all our expenses as we automate the non-negotiable ones, I’ve proven this method effective in many areas, most especially where we usually overspend such as groceries, entertainment, personal care, or eating out.
What is the Envelope Budgeting System
I think of the envelope budgeting system as the classic, perhaps the simplest way to budget your money. It basically works by getting all or some of your paycheck and dividing it across all spending categories. You will assign an envelope for each category, write down the name of the expense (mortgage, rent, insurance, food and grocery, clothing, gas, and so on) on each envelope.
You will then put the designated amount inside the envelope and use this money for such purpose until you get your next paycheck.
It’s up to you whether you want to do a monthly, weekly or bi-weekly budget. What’s important is you properly allocate your income into these categories and only use the appropriate envelope for your specific expenses.
So, for instance, if you’re going to the grocery one Saturday morning, you just need to bring your grocery envelope with you and only use the money from that envelope to pay for your food and groceries.
Now, if you have to gas up, take out your gas envelope and pull out money there to pay for your fuel. If you happen to drop by a restaurant for dinner with friends, use the money from the dining out envelope. If you need to pay bills, also use the appropriate envelope.
For every expense you make, take money out from the right category. Following this method religiously allows you to pay for every expense without going over the budget.
Nifty Tips and Tricks with the Envelope System
Now that you have a general idea of how the envelope budgeting system works, it’s now time to consider and apply these fantastic tricks.
Figure out a budget timeline and compute the funds you will need accordingly.
First, you need to know how you want to budget. You may opt to do it monthly, each week, or every paycheck cycle. Do the math to arrive at the appropriate income amount for the chosen timeline. For instance, if you receive your paycheck once a month but you want to do a weekly budget, then you need to divide the expense you are budgeting for by four. If you receive your salary every two weeks, then divide it by two, and so on.
List down your needs first, then wants
Now, you have to determine your basic needs so you can allocate your income on them first. Consider putting food, housing, healthcare and transportation in this category.
Next, list down your wants. These may include vacation, dining out, shopping, subscriptions etc. You want to organize your expenses this way so you know where to cut back should your income comes short.
The rule is to trim back on wants or things you can easily give up to make way for your more important expenses, namely, your basic needs. Allocate money accordingly to the designated envelopes.
Budget for the invariable expenses
A lot of your expenses may occur on a weekly or monthly basis, but don’t forget about those things that just occurs irregularly. For instance, if you are paying insurance premiums on a quarterly basis, make sure to fill the envelope for that each month. Just divide the amount by three and place the corresponding amount in the envelope every month. On the third month, you would have the required amount to pay for insurance.
Also consider filling up an envelope for emergency expenses. Having a budget for emergencies allow you to cover urgent expenses like speeding tickets, blown up tires and trips to the ER without messing up your entire budget.
So you’ve just used up your entire food budget but you still have three days more before your next payday. Don’t cheat and take money out from your utility bills or credit payment envelopes. Shuffling money around only defeats the purpose of following the envelope budgeting system. At this point, you need to be more creative and resourceful. Check out your pantry to see what meals you can make without having to buy another ingredient. Brown bag your leftovers so you don’t have to spend for lunch the next day.
Also, take note of the lessons. If you feel you need a bigger food budget, try cutting back on your shopping fund for instance. The first few months of following this budget will uncover new realizations about your financial habits, but you’ll find the perfect number for each expense as you follow through with this method. Don’t feel bad about getting it right the first time around. Every budgeting method needs some workaround before you get it right.
Save the leftover money to reward yourself or rollover to your next budget period
The sweetest reward about following the envelope budgeting system is seeing some money leftover at the end of the budgeting period. It just means you’re doing well living below your means.
Use that money to treat yourself to a fancy latte, throw it into your savings account or roll it over to the next budget period. If you have a $100 leftover for your food budget, wouldn’t it be great to have an extra hundred bucks to purchase your favorite meals for next week, without the guilt?
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The envelope budgeting system is a simple way to manage your money, but it takes commitment and discipline to efficiently implement it. I always feel a sense of order as I refill my envelopes, knowing that every expense is accounted and properly allocated for. Importantly, each envelope can make you feel more intentional and purposeful with your finances.