Long before there were complex computer software programs, people would rely on a simple concept to keep their spending in check, envelope budgeting. This old-fashioned approach to budgeting may be simple, but if you put it to use for your household budget, you’re likely to be pleasantly surprised at how effective it can be.
Where to Start with the Envelope Budgets
The first thing you need to do is figure out your monthly expenses. Subtract that amount from your monthly income. Hopefully, after doing this step, you will find that you live within your means and spend less than you make. If not, it is time to dig deeper and discover where all your money is going so adjustments can be made.
If you find the opposite, that you aren’t living within your means and spending more than you make, it’s time to reign in your spending habits. To do this, take another look at your budget and identify those areas that you are overspending. It doesn’t matter if you spend too much on expensive coffee, eat out too much, or buy too many electronic gadgets or shoes. Once you know where the financial leak is, you can plug it in. Certain expenses cannot be cut, such as a mortgage or rent, car payments, and utilities. You will have a degree of control over most other expenses and can then make the hard decisions on where to cut back or even eliminate them.
Utilizing the Envelope Budgets
To use this budgeting system, all you need to do is concentrate on the areas of your budget where you are using your discretionary income. You probably don’t need to use this method for your mortgage, car, other loan payments, or utility and grocery bills. Again, these are fixed expenses but still need to be accounted for when you look at your income and expenses as a whole.
Figure out which areas of your budget you need to work on, for example, dining out and clothing expenses. Get a plain full-sized envelope for each category that you have a little trouble with. On the outside of the envelope, write the category’s name so, if the envelope is for your dining out money, place dining out on the outside of the envelope. We sell a dozen color-coded Tyvek envelopes perfect for the envelope budget system that can work well in conjunction with our useful spreadsheet. You can get the envelope budget collection from Cash Budget System.
At the beginning of the month, go to the bank and get cash. The amount you get will depend on your budget for your spending. For example, if you’ve decided to work on your clothing and dining out spending, you will have two envelopes for each category. You will fill each envelope with the amount of cash you have budgeted for the month or two weeks, depending on the frequency of your paycheck. So, if your monthly dining out budget is $300, you will place $300 in your dining out envelope at the beginning of the month every month.
Now, whenever you go out to eat, you can only use the money from that envelope, and when it’s gone, you can’t eat out any more until next month. Do not take money from other envelopes.
Implementation of Envelope Budgets
If you are willing to make some daily changes in your spending habits so that you can get your finances under control once and for all, using the envelope budgeting method can be extremely simple yet effective. Like any budgeting system you choose, the system’s success will depend 100% on how diligent you are about sticking to it. If you cheat on your budget, no system will work for you. Stay committed to your financial goals and follow the system, and you’ll find that your money situation looks much better at the end of the month than it used to.
An Alternative to Envelope Budgets
With the current cashless world taking hold, the envelope budget system may be slightly more difficult to utilize, but there are also ways around that that still use the same pretense. You can use a pre-paid Visa debit card purchased from most stores and load it monthly. Here you may have to purchase more than one card or utilize a spreadsheet in addition to the envelopes to track your expenses. Place the receipt in the envelope and track your spending on a monthly tally sheet placed in the envelope as well. To get our budget spreadsheet visit Net Worth/Budget
Many feel that a budget is a foundation for a strong financial plan in financial planning. If you are unaware of where your money is coming from, there is little chance you know where it is being spent. Regardless of what system you use, the important thing is that you have a system in place.
For assistance or more information on budgeting, don’t hesitate to get in touch with me directly or reach out to a qualified fee-only Registered Financial Consultant (RFC) today. For those outside the Metro-Nashville, we can assist you as well virtually or find an RFC near you.
