If you are new to budgeting, check out How to Start a Monthly Budget to have a better understanding of how to start a budget and the envelope system of budgeting.
Before I started budgeting with Everydollar, I started first with the envelope system. This system worked well for me back then when I didn’t mind carrying cash and didn’t care about credit rewards.
What is the Envelope System of Budgeting?
The principle behind the envelope system has been around for years, even decades. It has been made popular by the finance guru Dave Ramsey.
Envelope system budgeting is the method in which you use envelopes to carry the cash that you budgeted for certain categories in your budget.
You will then use the cash for expenses that falls under that category.
For example, your budgeted $100 for dining out. Then take an envelope and assign dining out category on it. When you go out and eat with friends, use the cash from the envelope.
Once the money in the envelope ran out, you are done. You will have to wait for the next paycheck before you can eat out again.
Who is it Good For?
Although the envelope system is simple and easy, it is not for everyone. It only works well with some people.
PEOPLE WHO ARE COMFORTABLE CARRYING CASH
Since this method is a cash-only, you will be required to carry cash all the time. This can pose a problem for loss or theft.
However, with better planning, you will be able to get around this. For example, if you are grocery shopping, bring only the amount you need and keep it in a secure place.
PEOPLE WHO WANT TO START BUDGETING RIGHT AWAY
The good thing about the envelope system is that you do not need a lot of cash or buy any special materials to start. I started with just plain white envelopes.
PEOPLE WHO DO NOT CARE FOR CREDIT REWARDS
I collect point/miles from using credit cards and I use them for travel. I also rack in enough points for cash backs. But if you are not into that hobby, the envelope system will work well for you.
PEOPLE WHO CAN STICK TO A SUPER-STRICT BUDGET
The goal of the envelope system is to ultimately teach you discipline. If you have a Type A personality, it would not be a problem but it will be a struggle for those who need flexibility.
PEOPLE WHO DO NOT MIND MULTIPLE TRIPS TO THE BANK
Using cash only means a few trips to the bank every month. It will not be a problem if your bank is just a few minutes from your house. However, it will be a different story if you are not.
PEOPLE WHO DO NOT MIND NOT HAVING RECORDS OF TRANSACTIONS
Credit or debit card transactions will be recorded on your statement. This provides convenience when you have transactions that you will need later.
With the envelope system, all you have will be the receipts and you will be recording the transaction yourself.
PEOPLE WHOSE EXPENSES DO NOT FLUCTUATE SO MUCH
If your expenses fluctuate every month, the envelope system will be a little tougher for you.
Benefits of the Envelope System
Curbs Impulsive Spending
If you are someone like me who can be impulsive in buying things, the envelope system will help. There are some researches which show that using cash makes you think twice before you spend.
Because you only alloted a specific amount on a category, you will not likely to overspend once it’s depleted.
Prevents Unexpected Credit Card Debt
Using cash only for spending will prevent you from using your credit or debit card. This will avoid overdraft fees and interest rates.
The more we try to stick with our budget, the more we will be disciplined in managing our money.
Because we now know where our money is going, we will be able to adjust or trim our expenses to be able to save more.
Helps Tackle your Debt
The leftover money from your budget can now be used to pay down debts.
Provides a Clear View of Spending
Being able to see how much is left on your envelope every time you take out some cash will improve your awareness on how much you can spend.
How to Get started with the envelope system
Getting started with the envelope system is simple and easy. Just follow these simple steps.
If you want to know more about starting a monthly budget, click HERE.
Figure Out Income
Whether you are paid weekly, biweekly, or monthly, figure out your monthly takehome pay. Doing this will give you an idea of how much your household can budget.
List All Your Expenses
You can use your bank statements to check what your expenses are. Include all your bills, student loan, credit card payments, eating out, groceries, etc.
Categorize Your Expenses
Categorize your expenses to fixed expenses and variable expenses. Fixed expenses are expenses that cost the same every month. Examples of fixed expenses are those bills, mortgage, savings, investments, etc.
Variable expenses are expenses that vary every month. Things like groceries, eating out and entertainment
Figure out Discretionary Income
Discretionary income will be the amount left when you subtract the fixed income from the total income. This will be the money that you will divide among your budget categories.
Determine Your Budget
Once you know how much money you need to budget, decide on your categories.
This may include groceries, entertainment, eating out, pet care, beauty, etc. Then determine how much money you will allocate for each category.
Below is an example of a budget with hypothetical numbers.
It is time to go to the bank and get your cash. We get paid biweekly so I only withdraw half of the amount I budgeted.
Label Your Envelope
Prepare your envelope by labeling each one with the categories that you decided on. Then stuff them with the cash allocated for each category.
When you are ready to upgrade your envelope, check out this envelope system.
Spend and Pay with Cash Only
Now you are all set. You can start spending but use only the cash you budgeted.
What to Do with Left Over
You should first give yourself a pat on the back for sticking to your budget and even have leftover!
You can use your leftover money to treat yourself. This will give you the motivation to stick with your next budget.
If you are trying to get out of debt, use the money to pay down your debt.
You can also add leftover money to your savings. It can be your emergency fund, vacation fund or your retirement saving.
There you have it!
The envelope system as I have said is simple and easy. It has its benefits but has its shortcomings as well.
But as with any other budgeting system, it will only work if we stick with it.
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