Envelope Budget System

Budgeting can help you identify your spending habits, reduce overspending, pay your bills on time, and save money. The key is finding a budgeting method that works for you.

A cash-based method like the envelope budget system is a great way to physically see where your money goes each month. It can help you categorize your finances, identify financial priorities, and curb reckless spending. Read on to learn about how envelope budgeting works and how to use it to discover whether this budget system is suited to your household.

What is the envelope budget system?

Envelope budgeting is an old-fashioned yet effective system that divides your cash into individual envelopes. Each envelope represents a different spending category, such as groceries, transportation, and entertainment. In today’s modern era of electronic transactions, getting back to basics with the envelope budget system can be a refreshing way to manage your money.

How to use the envelope budgeting system

If the envelope method of budgeting sounds like something you’d like to try, we can help get you started. Here’s a step-by-step guide to creating an envelope budget:

1. Calculate your monthly income

The first step in any budgeting method is to figure out how much money you have to work with. This means calculating your monthly take-home income. Be sure to include any income earned from side hustles, investments, alimony, or child support.

2. Create spending categories

Next, you’ll need to categorize your spending. Your budget envelope categories will vary according to your individual spending habits, but they may include the following:

  • Groceries
  • Transportation
  • Household items
  • Pet care
  • Dining out and food delivery
  • Entertainment
  • Personal care
  • Gifts

You don’t need to include fixed expenses like housing, insurance, utilities, and debt payments as part of your envelope budget system unless you want to. Since these expenses remain the same and are paid electronically, you can treat them separately from your envelope budget categories.

3. Add cash to each envelope

Once you’ve created your envelope budgeting categories, it’s time to divvy up your cash. First, you’ll need to determine each category’s spending limit by referencing your prior spending habits and goals. Check previous months’ receipts, statements, and bills to figure out a realistic limit for each envelope.

For example, suppose you spent $120 on entertainment-related expenses last month but want to reduce your spending. In that case, you might set your entertainment budget at $80.

Next, create your envelopes and withdraw cash from your bank account. Stuff each envelope with the amount you’ve set for each category.

Your envelopes might look something like this:

  • Groceries - $400
  • Transportation - $120
  • Household items - $50
  • Pet care - $80
  • Dining out/food delivery - $120
  • Entertainment - $80

4. Spend the money in each envelope

The envelope budget system works best when you shop in physical stores and spend money in person. So, keep your envelopes handy and only use the remaining cash for each category when you make a purchase.

For example, let’s say you start off with $120 in your “Transportation” envelope. You pay $25 cash for gas and $50 for an oil change. You now have $45 left in that category for the remainder of the month.

With envelope budgeting, you can track how much you’re spending by writing the cash balance on each envelope and subtracting your spending amounts. This tip also comes in handy when you need to account for online purchases.

5. Adjust your budget as needed

It may take a few months to perfect your envelope budgeting system. For instance, you might underestimate how much money you need for a particular category. You might even allocate too much for another. That’s okay! This is your chance to get to know your spending habits and discover areas you can cut.

Pros and cons of envelope budgeting

As with any budgeting method, the envelope budget system has some benefits and drawbacks.

Pro: Simple system

Envelope budgeting is a simple, straightforward system that anyone can learn. It doesn’t require online banking, apps, or websites — and it relies on basic math.

Pro: Can keep you motivated

Since the envelope budget method uses physical cash, it can keep visual and kinesthetic learners motivated. Handling cash also makes you feel more connected to how much money you earn and spend, which fosters accountability.

Pro: No overdraft charges

Since envelope budgeting limits spending to the amount of cash left in each envelope, you don’t have to worry about accidentally spending more money than you have. That means no more overdraft fees!

Con: Cash can be less secure

On the flip side, carrying cash is less secure than shopping with a debit card. For instance, if you misplace an envelope or your purse is stolen, there’s no way to replace the lost cash.

Con: May be difficult for people who don’t use cash

If you’re just not used to paying for things with cash, envelope budgeting may be too big of an adjustment. This budget system also won’t be as effective for those who do most of their shopping online.

Envelope budget vs. other budgeting systems

How does envelope budgeting compare to other budgeting systems? Let’s take a look at some popular alternatives:

Zero-based budget

Originally used as a budgeting method for companies trying to boost profits, zero-based budgeting has become a popular way to manage personal finances. The key concept behind zero-based budgeting is that every dollar must be accounted for.

Zero-based budgeting may sound complicated, but it boils down to the fact that your income minus expenditures (including savings and debt payments) should equal zero at the end of the month. While its flexibility can be a perk, the lack of structure means you’ll need to hold yourself accountable and closely monitor your spending.

50/30/20 budget

The 50/30/20 rule is a simple budgeting method that divides your after-tax income into three categories:

  • 50% for essential needs
  • 30% for wants
  • 20% for savings

This method offers more flexibility than envelope budgeting. The downside, however, is that you can easily overspend on things you don’t need. 50/30/20 budgeting also may not work well for low-income earners with high housing costs.

The 60% solution

Another percentage-based budgeting method is the 60% solution. With this method, you allocate 60% of your income to “committed expenses.” Committed expenses include housing, food, personal items, insurance premiums, taxes, bills, and household items.

The remaining 40% is divided equally between retirement savings, short-term savings, long-term savings, and “fun money.” Even though the 60% solution doesn’t track your spending habits as closely as other budgets, it’s a simple method that’s great for first-time budgeters.

Is the envelope budget system right for me?

So, is the envelope budget system right for your household? As we’ve noted, envelope budgeting is a highly effective way to curb overspending and see where your money goes each month.

Even so, you must be willing to use cash and spend some time stuffing envelopes after every payday for it to be effective. If you’re the type of person who appreciates this level of interaction and accountability, go for it!

The envelope budgeting system can help you save money

At the end of the day, the best budgeting system is the one you can stick to. Envelope budgeting is a tried-and-true method that works for those who prefer a cash-based approach. Give it a try to see how much money it can help you save!

Are you still coming up short on cash despite budgeting? We can help when you’re low on cash and need fast funds. Apply for an Advance America online loan today.

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