Using an Envelope System Could Make Budgeting Easier
Finding the right budgeting system can take the hassle out of managing your money. The envelope system is a popular option for creating a household budget. But how does the envelope system work and is it the right choice for you? If you're looking for a new approach to budgeting, here's what you need to know.
What Is the Envelope System?
In a nutshell, the envelope system is what it sounds like—dividing up your monthly or weekly funding budget into various paper envelopes.
Each envelope is assigned to a specific category, and is designed to manage discretionary expenses. Discretionary expenses, also called variable expenses, are amounts you spend every week or month but might change from month to month.
How to Set Up an Envelope System Budget
Learning how to budget using envelopes isn't that difficult, even if you've never budgeted before. It's very similar to making any other kind of budget, with a twist. Here's a checklist for getting started:
1. Establish Budget Categories to Assign Each Envelope
The first step in using an envelope system is deciding which expenses to include in your envelopes. This part of the process is personal—you're tailoring each envelope to your specific budget and spending.
Your envelope labels might include general categories such as groceries, gas, clothing, entertainment, and savings, for example.
2. Allocate Dollar Amounts to Each Envelope
Once you have envelopes for the expenses you want to manage, decide how much money goes into each. This should be easy to do if you've already added up your income for the month, then subtracted the amounts you need to set aside for your fixed expenses. If you haven't done that yet, hit pause and tackle that task.
If you’re paid weekly or biweekly, you may need to look at budgeting on a weekly level.
The sum total of the envelopes should reflect the sum total of cash you have to assign.
On the front of the envelope, write down the starting amount you have to spend for that budget category.
3. Withdraw Cash to Fill Your Envelopes
At this step, you withdraw the cash you need to fill your envelopes. Ideally, you add the cash you need to each envelope at the beginning of the month. Then for the rest of the month you take money out of the relevant envelope when you need to make a purchase in that category.
If you're planning to withdraw cash for your envelopes from an ATM, check your bank's maximum daily withdrawal limits first. You may need to visit a branch instead to get the total amount of cash you need. If you don’t have enough money in your account for the month, set up a weekly envelope system.
4. Track Your Spending for Each Envelope
If you've divvied up the cash in your envelopes you're ready to start spending money for the month.
To make the system work, keep a running total of how much money you have to spend for each category. Each time you withdraw money, subtract it from the amount to get a running total of cash remaining. Take the envelope with you when shopping, or if you don't have time to jot down how much money you've pulled out of your envelope before making a purchase, store the receipt and come back to it later.
Sing the Envelope System With Credit or Debit Cards
The envelope system may be harder to use if you’re paying all of your expenses with a debit card, or use a credit card that you try to pay off monthly. If you primarily use credit or debit cards, there are web and phone apps that rely on a virtual envelope method.
Or you can create your own system in the following manner:
1. Establish budget categories and assign an envelope to each category. Write on each how much you intend to spend for the month.
2. Always request or accept receipts when using your card, and add receipts to the envelope at home. Write each receipt amount on the correct envelope’s exterior to keep a running total of expenses.
3. Don’t spend more than the amount you’ve assigned.
The Bottom Line
The envelope system isn't hard to master, but only spend what's in each envelope. Once the money in a specific envelope is gone, it's gone for the month. You can't spend more in that category until the next month starts or dip into other envelopes. The purpose of using envelopes to budget is to stay in control of what you're spending. If you’re spending more than you have, change your spending patterns or your budget.
Remember that you don't have to spend each envelope down to $0 each month. Cash left over means you spent less than you planned. Pay down debt, or add leftover cash to your emergency fund. Giving any extra dollars a purpose is key to ensuring the money doesn't go to waste.