Need to overhaul your budget? The Envelope Budget is a very strict budgeting method that will help you stick to your budget. This method uses absolutely no cards – no debit card and no credit cards. You only use cash. The idea behind this is firstly, people are less likely to spend cash compared to spending on plastic. Some people even put their cards in a giant ice cube in the freezer (You don’t want to cancel your cards as this could damage your credit.) Secondly, you can’t overspend. You can spend all your cash on whatever you want, but when you’re out of cash you don’t get anymore. This is a great budget to teach yourself how to budget.
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What is an Envelope Budget?
The envelope budgeting system is a budgeting method where cash is deposited into category envelopes. Each category has it’s own envelope and that money can only be spent on that particular category. When your envelope is out of money you can no longer spend any money from that category. Any leftover money is usually used to pay off debt or added to your savings.
Why You Should Use the Envelope Budgeting Method
- Stops Overspending. Once you’re out of cash your done. By eliminating your plastic cards (freezing them,) you can’t spend more money than you have.
- Reduces Debt and Increases Savings. Any money left over by your next pay period (or money adding date,) should be transferred to a savings account or used to pay off debt.
- Keeps you from getting more into debt. With zero access to your credit card, it makes it very hard to obtain more debt.
- Teaches you how to budget.
There are so many different ways to do an envelope budget. How you choose to do it will really be up to you. I don’t think any way is better than another but some will definitely work better for others. Here are a few variations:
- All cash is sorted into their respective envelopes. Keep in mind this isn’t completely practical if you have automatic withdrawal payments. Even worse is either mailing money in to pay your bills or going into the bank. I absolutely do not do this. I have Christmas photos I meant to mail out sitting on my desk right now (it’s May), and I’m not waiting 30 minutes in line to pay my bills at the bank.
- All bills are paid online and the rest of the cash is sorted into their respective envelope category. This will save you a trip to the bank and/or the post office. The rest of you cash is sorted into the specific categories.
- All bills are paid online and cash is separated into general categories. This is the variation I prefer over them all. After all the bills are paid, the cash is separated into a few general categories. The best part is when your shopping you don’t have to use separate transactions, especially at department stores where you can buy clothes, food, and other stuff all in one place.
No matter which variation you choose, they’re all created the same way.
How To Create Your Envelope Budget
Step 01. Create Your Budget
The best (and fastest) way to create a budget is to start with nonnegotiable items first. These would include things like your rent/mortgage, utilities, minimum debt payments, and insurance. Subtract these from your total net income (the amount on your paycheck after any deductions.)
Create a list of any and all other categories that you need and/or want. Divide the remaining money into those categories. Make sure that you have enough money for important categories such as groceries. This may require sacrifices to entertainment and other nonessential categories.
Step 02. Create Your Envelope Budget
Assign each envelope a category. The amount of envelopes you will need will depend on the variation you choose and the amount of categories you have
Step 03. Get a Tracking Method
You should be tracking all money that comes in and out of each envelope. This can be done on the envelope itself, or you can include a little piece of paper inside the envelope.
Step 04. Add Money to Your Envelopes
With storage and tracking systems in place, you’re now ready to add the money into their respective categories.
Each pay period, you will refill all your envelopes. Any leftover money is usually put into a savings account or used to payoff debt. This is ideal for people whose pay periods are; weekly, semiweekly, or bi-monthly. If your pay periods are monthly and you’re having trouble restricting yourself, only put enough money into your envelopes for a week or two at a time.
Step 05. Spend
Let’s not get too crazy. Spend on what you need, and try as much as possible to avoid those you don’t need.
This will take an adjustment. But it definitely can work. I used this budget when we moved to a new city for my husband’s job. We were living “paycheck to paycheck” before moving – I say it like that because it was 100% conscious overspending. After moving my husband got a $250 raise, but our living expenses increase by $800. That $800 was strictly for rent and utilities! Using this method, we didn’t acquire any debt and were actually able to pay down our debt.
Step 06. Reassess
You’ve tried the envelope budgeting system for a couple months now and it just isn’t working for you? Now is the time to reassess. Maybe you have extra money sitting on one category or you find yourself constantly borrowing from other categories.
Why isn’t The Envelope Budgeting System working for me? Here’s a few changes you may need to make:
- You’re still overspending and you are really going to need to cut back. But you already knew you were overspending before, so what’s changed? Firstly, you have now narrowed it down where you’re overspending. And secondly, inside your handy little envelope is all the receipts for every single item you have purchased with in that category. Now you’ll have to go through all your items and find out what you need to cut out or cut down on purchasing.
- Readjust your budgets. Some might not need as much money as others. Swap the money to your underfunded envelopes.
- You’re over budget but you can’t sacrifice anything you have purchased from that category? Well unfortunately, something will have to be cut (or you’ll have to increase your income.) But you don’t have to cut something from that category. If you need to increase your food budget, maybe your clothing budget or entertainment budget can take a cut and you can transfer your money from there.
Don’t think this budget will work for you? Try the 50/20/30 budget instead!
Have you tried the Envelope Budget method before? Do you love it or hate it?
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