Budgeting is all about balance. Keeping a steady savings account brings stability to your financial life and helps eliminate a major source of stress. Perhaps you’ve used Excel spreadsheets and other techniques, yet continue to spend out of your comfort zone? There’s nothing wrong with spreadsheets, but there also aren’t many incentives to make sure you stick with the program. If you’ve ever tried traditional budgeting techniques in order to manage your finances and cut down on unnecessary expenditures, you may have heard of the envelope system.
What is the Envelope System?
How do you stay disciplined on a strict budget? How do you hold yourself accountable to stick to your limits when past methods seem to fall apart at the slightest strain? The envelope system gives you plenty of incentives to stay disciplined. While many people still aren’t sure how they can take advantage of it, this method has been around for a while, and it’s as simple as the name implies. Each month, pick a number you’re willing to spend on certain expenses like food or clothing, then place that amount of cash into an envelope. This restricts your purchases by allowing you to use only the money from each category’s envelope. Common categories include food, clothing, transportation, and entertainment. Just make sure to give yourself plenty of room for unplanned circumstances – unless you’re confident that you know exactly how much you’ll spend. Remember, aside from dramatic circumstances, staying healthy is worth a small hit to your wallet. With proper planning, it’s easy to eat healthy on a budget.
Using Envelopes to Manage Your Finances
The envelope system begins with just a few steps:
- Figure out how much income will remain after paying your bills. This figure is called your discretionary income – you’ll need to estimate how much money you expect to spend on expenses like food and clothing each month while making sure not to exceed this figure.
- Allocate your resources using envelopes. For example, let’s say you decide to spend $200 on food for the month. Withdraw the cash from the bank and place this money in an envelope labeled for food and other dining expenditures. Any money you spend on groceries must come from this envelope. Keep in mind that you should bring only the amount you plan to spend for that trip with you. You do not want to be carrying hundreds of dollars around with you.
- If you do not use all the money in the envelope, use any leftover funds to cover debts and build your savings. It’s as simple as that. At the end of the month you’ll probably have leftover money in a couple of envelopes depending on how often you buy new clothes, eat at sit-down restaurants, or see a movie. Leftover entertainment expenses like these usually make for a substantial supplement to your savings at the end of the month.
Is it Right for You?
Simple, yet elegant. The envelope system works well without complex math or organizational expertise. It can help teach you discipline, encourage you to stay organized, and make your budget feel tangible. If you’re prone to overdraft your debit card, you can use this method to steer clear of overdraft fees. Since you’ll be paying for almost everything with cash, you won’t have to record your payments as you would on an app or electronic budget tracker. Seeing your money disappear right before your eyes with every purchase might just put an end to those extra indulgences. You may not earn many credit card rewards, but you can always adjust the system to suit your needs. After all, it’s easiest to buy some expenses – like gas – with a card.
Overall, it’s a great system for anyone seeking an old-school approach to money management.
That said, the envelope system suffers from a few notable drawbacks. If you truly want to save as much money as physically possible, the envelope system might not suit you. This method matches your money with your priorities, but it doesn’t encourage absolute maximum efficiency. Creating an “entertainment” envelope for movies and other leisure activities encourages spending, not frugality. If your situation changes mid-month, you may have to cheat the system to stay afloat.
Consider the following scenario: let’s say that gas prices spike and your budgeted “gas allowance” dries up before the end of the month. You can’t go to work without gas, so you’ll have to break the rules and add a little more money to the envelope. In a perfect, stable situation, the envelope system works well. In reality, no one can predict the future. If you’re in between budgets and simply can’t settle on a favorite, it may help to experiment. Try different ways to manage your money – mix and match the best techniques until you find something that works for you.