Do Envelope Budgeting

After you budget your money, your next challenge is to follow through. Debit cards are easy to just swipe and spend, without really considering your carefully constructed budget. As a result, it can be difficult keeping track of how much money one have left for everything. One tactic many people find helpful is going "old school" and use cash. Seeing the money leave your hand and being able to quickly ascertain what you have is a great way to focus on money flow. Note that this is not a permanent solution, but a good exercise in budgeting to eventually go back to using debit cards.

Steps

  1. Create your budget. This means dividing your money into categories. Avoid "Miscellaneous" categories, as you should ideally know where your money is going.Some suggestions include:
    • Rent or mortgage payment
    • Childcare
    • Automobile costs: Gas, Insurance, Repairs, etc.
    • Groceries
    • Club Fees (or some type of organization): Gym, Girl Scouts, Yoga Studio, etc.
    • Utilities
    • Taxes (if these are not taken out automatically or for some reason you need to pay back).
    • Saving (which should be transferred into your bank account)
    • Entertainment: Eating out, Concerts, Movies, Outings, etc.
  2. Assign each category to a single envelope. You will be putting the cash assigned to various spending items in these envelopes. Use whatever size works best for you. The money that will be spent outside your home should be kept in envelopes that fit easily in your wallet or purse. Use a marker and make it easy to read.
    • Plastic envelopes may be better in a purse or briefcase, as paper ones tend to disintegrate.
    • Coupon holders or mini accordion folders work well too.
  3. Break down your income into the various envelopes. All of the categories that get spent incrementally (that is, not all at once) should be spent in cash. Rent, mortgage payments, or anything you're only going to pay once and in full can have their envelopes left empty, or you can write a check and put it in there, or you can get rid of those envelopes altogether. The remaining envelopes, however, need to have the allocated cash inside. If you budgeted $500 to spend on groceries until your next paycheck, for example, put $500 cash in that envelope.
    • Optional: In pencil, write on the back of the envelope how much you are putting in. This can help you get practice in keeping a balance.
  4. Pull money from the envelopes as needed for that category. Recalculate how much is left, and write it on the back, so you know how much remains at a glance. If you run out of money for a category but need more, you only have two choices:
    • When an envelope is empty, you can not spend any more money in that category; you have spent it. This becomes a concrete reminder that if you spent all your entertainment funds, you are really out.
    • Pull money from another envelope. Of course, that leaves you less money to spend in that category.
  5. Understand the Limits of the Envelope Budgeting System. This is a great training tool, and for some people it is exactly what is needed to keep on budget. But this is still supposed to be a temporary use situation, not a permanent lifestyle. Living out of envelopes does have some drawbacks:
    • Security: If your purse is stolen, car broken into, or roommate turns criminal, stolen money has very little security. A debt card at least has a number, a PIN and if it is stolen and used, it can be "frozen" to protect from further misuse. Cash has none of those protections.
    • Lack of Convenience: Using cash for everything may mean you cannot make an online payment. You cannot transfer money to a spouse in an emergency. Or an automatic payment online. Or if your car breaks down, and you need emergency repairs you may not have a way to pay for it. This can be problematic.
    • Complicated Money Situations: This system works best for people with relatively straightforward financial situations. This may work wonderfully for a 23 year old single female learning to budget for the first time. However, it does not work so well for more complicated financial situations. A 62 year old father who owns a dog grooming business and saving for retirement should likely not be dealing exclusively in cash.
    • This may not be a long-term organizational solution. For some individuals, this really is the best way to organize funds. However, the envelope budgeting system is usually best used as a transitional system. Eventually, you should be able to get a sense of how to keep within budget and not need all of those envelopes.
    • It is best to use a banking institution. Some people do get by without a bank account, but going without one has drawbacks. There is security putting funds in a bank unavailable to cash as mentioned above. Maintaining a bank balance is vital in establishing credit. If you do not have a bank account, sending money orders incur fees that are much more than checks.

Example

You get paid twice a month. This paycheck is for $1300. These are the bills that will be due before your next paycheck:

  • Rent - $600
  • Utilities, water, sewage - $150
  • Electric - $80
  • Student loan payment - $100
  • Total: $930

Assuming you know for sure that your next paycheck will cover your bills and then some until the paycheck after that, you might divvy up remaining money ($370) as follows:

  • Savings - $70, transfer to savings account
  • Groceries (food, toiletries, etc.) - $100, cash in envelope
  • Gas - $60, cash in envelope
  • Entertainment - $70, cash in envelope
  • Dining out - $70, cash in envelope



Tips

  • If you have been using an envelope for car payment and you complete paying for the car, continue to make at least half of that payment each month towards a new car or towards general savings. Because you are already used to making this payment, it's money that you won't miss, and when it's time to buy a new car, it won't hurt so much having to start making payments. For the long times that pass between new cars, this money would do well in a bank CD or mutual fund that's not too risky.
  • Consider using recycled envelopes. You probably get dozens in the mail each month. If you open them with a neat cut, you'll have a fresh set of envelopes delivered to your door each month.
  • Envelope budgeting works particularly well for keeping track of cash spending. Paying cash, particularly when you have a clear, visual indicator of how much cash is allocated, will probably result in your spending less, overall.
  • If you're low on cash for a category, and think you might need more, pull some money from another envelope before you leave. The last thing you want to do is pull out your debit or credit card.
  • Never, ever, pull additional cash from your bank account, or use a debit or credit card, if you want to stay within your budget. No budgeting system works unless you stick to the parameters that you have set. Sometimes you might overspend, but the resulting discomfort will motivate you to keep better track of your money next time.
  • You may find it useful to have a "bank" or "debit card" envelope, so that if you want to buy concert tickets online, for example, you can use your card and replace the money from the relevant budget envelope into the bank envelope. This money stays in the envelope until the end of the month or budgeting period and can then be deposited back into your account. This is a great way to avoid overspending, and you'll feel great putting money back into your account!
  • Some people keep receipts for any money they spend, and put those receipts in the envelope. This can help with seeing how you spend your money (and where you can cut corners). It can also be useful during tax time.
  • Try using bills in larger denominations. Even if it is the same amount of money, you may be less tempted to spend it (especially little bits of it) if you must break up a larger denomination to do it.
  • Consider tracking your envelopes balance digitally, using an app such as Envelopes 2 on the iPhone or Evelopes (budget system) on android
  • Pay yourself first. The purpose of a budgeting system is to make sure you don't spend more money that you have, but it's also a great way to save money. The best way is to reserve that money before you create the rest of your budget. That is, deposit your paycheck and take out only what you allocate for spending during that month or pay period. Leave the rest in the bank.

Things You'll Need

  • Envelopes, whatever size works for you
  • Marker
  • Cash
  • Budget

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Sources and Citations

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