One of the easiest ways to track your spending is to switch to an envelope budgeting system. While this may seem like a trendy new way to manage your daily budget, it's actually a system that's more than 100 years old. Most likely, your grandparents used this system or one similar to it.
Here's how it works: You divide up all your discretionary spending into envelopes by category. So one for eating out, one for groceries, one for clothing, one for miscellaneous spending, etc.
Generally, you would not pay your bills via this system; rather, you'd continue to pay them out of your checking account via direct debit. However, to make the envelope system work for you, you should stop spending stop using your checking account except to pay bills.
Read on for other tips and tricks on how to make an envelope budgeting system work for you.
Decide the Categories You Will Switch to Cash
Before you start the envelope budgeting system, you'll need to create your budget. Then you will need to determine which categories you are going to switch to the envelope system. Pro tip: these categories should be any line items that involve discretionary spending.
Common categories that are used are groceries, eating out, gas money or cab fare, entertainment categories, fun money, clothing costs, and household expenses.
Withdraw the Cash at the Beginning of the Month
The next step is to add up your discretionary spends and make a withdrawal at your bank for the total. Generally, it is best to write a check and request the required denominations you need for each category. For example, if you're allocating $25/month for household items, you'll need a twenty and a five dollar bill in that envelope. Remember, no "borrowing" from other envelopes!
Organize Your Envelopes for Each Category
Then, you'll label your envelopes with the categories and monthly allotted spend, then put the correct amount into each envelope. Find a safe place in your home to store your envelopes, and remember not to carry them with you at all times.
While it's never a good idea to carry a large amount of cash, you may want to get into the habit of carrying $20 in cash with you at all times to cover unexpected expenses or any potential spends at a cash-only business.
Take the Envelopes With Your When You Shop
When you goshopping or to have fun, take money from the appropriate envelope. You do not want to take the whole amount with you, because you will be more likely to spend it all. This is especially true for your food and entertainment categories. So take what you'd like to spend on that particular outing, then when it's gone, it's gone.
Afterward, put the receipts in the envelopes so that you can track your spending at the end of the month. This may help you notice spending issues and identify problems areas, such as shopping or eating out.
Stop Spending Money as You Run Out of It
The most important takeaway with the envelope budgeting system is that when you run out of money for one particular envelope, you have to stop spending in that category. This is why this budgeting system is so impactful –it helps you stick to your budget without running out of money each month.
Another plus, if you consistently run out of money in one envelope each month, that may show you that you have a budgeting or spending issue in that category.
Roll Left Over Money to the Next Month
If you have money leftover in the categories, you can choose to roll it over into the next month. This may work for some categories like groceries, so that you can stock up where there is a good sale or when you are saving up for something more expensive.
You may also splurge with extra money, use it to pad your emergency fund, or put it toward one of your long-term financial goals.
Other Tips:
- Divide some categories into weekly amounts. You can create sub-envelopes for weekly expenses so you do not spend all of your money at the beginning of the month. This works especially well for categories like your groceries. This way you know you will have some money at the end of the month so you are not just eating ramen.
- There are benefits to spending cash. People tend to spend less when they must count out the cash when shopping, while they tend to overspend if they know they are using a credit or debit card. You may find that your spending goes down when you are using this method.
- Shop with a specific list and estimate your costs before you go into the store. In addition to a shopping list. you can use the calculator on your phone to track what you have spent. This can help you stick your budget, especially on big shopping trips like the grocery store or when you go to a bulk store to stock up on supplies. You can estimate the costs of the items on the list before you go to the store to help you stay on track.
- Consider using a billfold or coupon organizer for your cash. If you do not want to carry around envelopes, these are good alternatives. You can find them in office supply stores.
- Leave your cards at home. If you know you will be tempted to dip into your checking account when you are shopping, leave your cards at home. This will force you to pay more attention to your spending when you are at the store. You can use the calculator on your phone to track your total before you get to the checkout.
Updated by Rachel Morgan Cautero.
FAQs
You begin with multiple envelopes, each of which represents a budget category. You then assign a certain amount of cash to each one, based on how much you anticipate spending in that category for the month. Once an envelope is empty, you can't spend any more money in that category until your new budget period begins.
How does the envelope system help with budgeting? ›
The idea is to split up your money according to how much you want to spend in each category—and then only let yourself spend until the cash in each envelope is gone. Envelope budgeting works best for variable expenses, like groceries and dining out, which change slightly every month depending on your spending habits.
How does the envelope system help to budget for planned monthly expenses? ›
The cash envelope system (aka cash stuffing) is a way to manage your spending by putting cash in physical envelopes labeled for specific budget categories. The goal of cash stuffing is to only spend what's in your envelopes for the month.
What is one benefit of envelope budgeting Quizlet? ›
What is one benefit of envelope budgeting? Helps control spending and stay within budget.
How can budgeting make your life easier? ›
A budget helps create financial stability. By tracking expenses and following a plan, a budget makes it easier to pay bills on time, build an emergency fund, and save for major expenses such as a car or home. Overall, a budget puts a person on stronger financial footing for both the day-to-day and the long term.
What is the benefit envelope system? ›
The envelope system is a way to force yourself to accurately budget discretionary expenses every month. It demands honesty, discipline and commitment, but the reward is that you gain control of your finances.
What is the importance of building envelope system? ›
The building envelope keeps outside elements, such as moisture and humidity, from entering and causing major damage. Envelope components are designed to prevent water leakage or infiltration to the interior by systems such as: A barrier system which is designed to repel and shed water at the outermost surface.
How does the envelope challenge work? ›
It works like this: Gather 100 envelopes and number them from 1 to 100. Each day, fill up one envelope with the amount of cash corresponding to the number on the envelope. You can fill up the envelopes in order or pick them at random. After you've filled up all the envelopes, you'll have a total savings of $5,050.
What is a key benefit of the budget process? ›
The process of budgeting simply helps you prioritize which wants give you the most satisfaction and how often you can afford them rather than unmonitored spending that overextends you. Manage your cash flow, tackle your expenses and find out the right budgeting style for you.
What are the downsides of using a cash envelope budget? ›
Cash stuffing, like other budgeting methods, is a way to plan out your spending and keep track of expenses. While it can be helpful for curbing overspending and limiting credit card debt, the downside of budgeting with cash is that you're missing out on the protection and yields offered by bank accounts.
The cash envelope system is visual, making it simple to see just how much you're spending on various categories throughout each month. It could also help you understand what changes you might want to make to meet your saving goals.
What are the benefits of budgeting and why they are benefits? ›
Why should I create a budget? A budget is a guide that keeps you on the path to reach your financial goals. Budgeting keeps your finances under control, shows when you need to make adjustments to your spending, and helps you decide where your money goes instead of wondering where it all went.
What are the major benefits of budgeting quizlet? ›
What are the four benefits of budgeting? Identifies spending priorities, prevents potential conflicts with loved ones, aids the development of a financial plan, and encourages good stewardship.
How to budget with envelopes? ›
The concept is simple: Take a few envelopes, write a specific expense category on each one — like groceries, rent or student loans — and then put the money you plan to spend on those things into the envelopes. Traditionally, people have used the envelope system on a monthly basis, using actual cash and envelopes.
What is a major advantage of budgeting? ›
Answer and Explanation:
A major benefit of effective budgeting is it compels managers to think ahead, it aids managers in communicating objectives to employees and it provides benchmarks to evaluate subsequent performance.
How important is budgeting in life? ›
A budget is the foundation of your financial life—it's there to help you build your spending and saving habits. It can help you direct your income toward your needs and wants, and steer clear of overspending and consumer debt.
What is the purpose of an envelope How might you use it? ›
An envelope has only two purposes, according to Grant Johnson, President and CEO of Johnson Direct, a successful and well-known marketing company. One is to securely carry its contents from origin to destination, and its other purpose is to get opened.
What budgeting app uses the envelope method? ›
Bringing Simple Envelope-Style Budgeting to Your Phone
RealBudget is designed to bring you the simplest form of money management in the most straightforward way possible. Create monthly budget envelopes, enter transactions, and track how you spend your money each month.
What is the aim of the envelope? ›
One is to securely carry its contents from origin to destination, and its other purpose. An envelope is a form of packing. Envelopes are used for sending letters or documents using regular postal mail. Envelopes are usually made of paper or hardened paper.
How can you use the envelope method of budgeting to monitor cash flows? ›
Each envelope represents a budget category, such as groceries, entertainment or eating out. Start the month by putting the amount of cash you've budgeted for each category in a separate envelope. Once an envelope is empty, you can't spend in that category until next month.
