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How to Budget Using the Envelope System

Envelope System

You can find a lot of fancy software and online tools to help you budget your money better. However, a lot of people find that the old-school envelope system works out the best for them. Because the envelopes are physical items with cash inside of them, it might be easier to visualize both saving and spending with them, than it would be to use an online tool.

Estimate Your Budget First –

The first thing you need to know is how much money you will have coming in each month. Most people estimate for a month at a time because most bills are sent every single month. In order to make a good estimate and use this system, you need to divide your spending up into categories. This might include groceries, entertainment, utilities, gasoline, insurance, and whatever else you may need.

Simply label one envelope with each spending category that you have come up with. If you want to make envelopes for saving money, emergencies, and paying off debt, that’s great too.

Allocate Money to an Envelope for each Category –

When you get paid, distribute money into each envelope by its category. You might have some fixed bills like your phone, cable, and rent. Fixed bills should be pretty easy to figure out and handle. Other bills might be variable, and these include your water and utilities. Variable bills are a little tougher because you might have to estimate some of them.

Make sure you estimate wisely. It will be a lot more fun to take some money out of a variable money envelope or leave it to help with next month’s bill, than it would be to have to remove money from your entertainment or travel fund.

You Must Stop Spending When the Money is Gone –

It is true that you cannot always just stop spending money. If you only planned on spending $100 on your electricity bill, and your bill is $110, it would not be prudent or frugal to underpay that bill. However, you might need to take some money out of the envelope you were hoping to stash away cash to buy a new outfit or new shoes.

However, since you have taken the time to budget, you can take satisfaction in the fact that you still have the money to pay the bill even if you need to wait another month to buy your new purse, clothes, or shoes.

The envelope system works pretty well for people who are trying to rely on cash in order to budget better. You can also modify the system to only use it for disposable income. In other words, you know you have to pay your utility bill and phone bill every month, so create envelopes for that. You might want to just budget for luxuries and bills that are easier to control. How you use the envelope system is really up to you. Give it a try for a few months and see how things go.

Questions or comments about the envelope system? Have you tried this budgeting strategy before, and if so, what were your results? We’d love to hear from you!


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