Let's be honest: budgeting can be a bit tricky! With the cost of living being so high and unexpected expenses popping up at the worst times, it can feel overwhelming. But don't worry, there's a tried-and-true method called the money envelope system that might just be the perfect fit for you. This approach helps you keep a close watch on your spending across different categories. While it does take some effort and might not be the best fit for those who love digital solutions, it could be the answer if you're having trouble sticking to a budget or haven't found a method that clicks for you. Let's dive into how it works!
The first step to the envelope system of budgeting is the same as the first step to every system of budgeting – you need to know how much you spend! Track all of your expenses for three whole months. Be sure to note if the spending is necessary or discretionary – for example, you have to pay your rent each month, but do you really need the Netflix subscription? This will help you determine exactly how much discretionary income you have.
Divide your income into different sub-categories like rent, food, entertainment, transportation, and clothing costs. Be sure to assign each line item in your spending to one of these categories, so everything has its place. Review your spending over a few months to get an idea of how much you’ll need for each one. It’s important to use multiple months of spending to calculate this since discretionary spending may fluctuate from month to month, for example, maybe two months ago you went to the movies four times, but last month you didn’t go at all. Neither month on its own is a good representation of how much you spend at the movies each month, but the average will give you a more accurate idea.
For each expense category, take an envelope and label it clearly with the name of the category. Inside each envelope, put the exact amount of cash you have budgeted for that category for the month. This is why it’s important to make sure every expense has a category assigned to it – the goal is to account for all of your spending within these envelopes.
Now you’ve done the hard part in setting up and organizing your budget. The easy part is sticking to it – you can only use what’s in the envelope to pay for expenses in that category and nothing more!
If you get to the end of the month and some of your envelopes still have money in them, then you’re free to use it however you want! Celebrate by going out to dinner, reward yourself with a treat, or roll it over into next month’s budget to give yourself some extra breathing room.
That’s all there is to the money envelope system of budgeting! While there are certainly ways to budget that require less effort and planning, like simply using an app on your phone, there are great benefits to budgeting this way. Physically having your budget laid out in front of you makes it a lot more difficult to accidentally overspend (or convince yourself it’s ok to overspend) than simply putting everything on your credit card and tracking in an app or spreadsheet. It’s hard to ignore physical cash that’s simply no longer there. Another benefit of the money envelope method of budgeting is that sticking to your budget is actually the easy part if you’ve correctly calculated your expenses. All you need to do is go to the envelope and take the cash you need or count the cash you have left – it’s a lot more straightforward than trying to calculate your expenses by going through your recent card transactions once you get the hang of it.