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How to Use the Envelope Budgeting System

Ever since the financial collapse happened and households everywhere attempted to rein in their spending and get their personal finances in order, old-fashioned budgeting techniques have returned to the forefront of money saving. Thanks to the likes of personal finance gurus Dave Ramsey and Gail Vaz-Oxlade, certain budgeting techniques, like the envelope budgeting system, have become popular instruments to spending money, setting money aside and being money smart. 

See AlsoHow to Stick with a Budget 

Unfortunately, most United States households do not maintain a budget. According to a 2013 Gallup poll, just 32 percent of households establish a budget to keep track and monitor income and expenditures. This is troubling news considering that an immense number of individuals and families live paycheck to paycheck and most have a personal savings rate in the single digits. We’re bringing in middle-class incomes, but spending money like we’re Donald Trump. 

Despite the vast amount of personal finance websites, mobile apps, Microsoft spreadsheets and talk shows dedicated to money, people are yet to understand the importance of keeping a budget. Perhaps it’s time for more people to adopt the envelope budgeting system. This may seem like something that your grandparents or distant ancestors did, but it’s a proven method. (Of course, it doesn’t actually have to be an envelope, it could also be a jar). 

So, what exactly is this envelope budgeting system? Here’s a basic explanation: 

Let’s say you have a monthly budget of $250 for transportation. When you receive your very first paycheck for the month, take out $50 from your check and place it into the envelope or jar. On that envelope or jar, you simply write "transportation," which will later be used for public transit, gasoline or anything else related to your transportation for the month. 

It’s that simple! You don’t need any algorithms, any mobile app updates or expensive data plans to accomplish this feat. This system has been around for decades, and if you peek around your grandparents’ home, you’ll probably find old boxes of envelopes for their rent, groceries, transportation and other things. 

Now that you have learned just what this initiative is, you are interested in adopting this custom. Here are seven steps to fully incorporate an envelope budgeting system into your lifestyle.

1. Create Your Own Budget

Sit down, grab that cup of coffee, bring the pad and paper to the desk and start to create your very own monthly budget. If it helps, turn on some music that will invigorate the little gray cells in your brain, as Hercule Poirot would say. Johann Sebastian Bach and Erik Satie are some recommendations for music. 

This budget should consist of multiple categories, such as rent/mortgage payments, transportation, groceries, utilities, entertainment and so on. 

To have a successful budget, be sure to take a look back at old bank statements or receipts to get a definitive grasp on how much you spend on each category. Once you’ve determined the final amount, you should then round up the number. For instance, if your groceries are $350 per month then make it $400. If you have extra money at the end of the month then you can allocate this money to the next month or place it in your bank account. It’s a great way to trick yourself into saving more money. We all know how much you love buying ice cream at the grocery store.

2. Write Down Each Category on Envelopes

Now that you have produced your budget, grab the required number of envelopes and write down each category on the front of the envelope. Use whatever size of envelope you deem appropriate, but it should be able to fit inside your wallet, purse or bag. Also, use a marker and ensure the envelope is easy to read. Another piece of advice is to use plastic envelopes and coupon holders. 

Another trick to make it work is to note how much you’ll be putting in on the back of the envelope. This helps you keep track how much is going in and how much is going out.  

Whatever you do, don’t use pencil. We know that you want to use pencil to make lying easier.   

3. Allocate Your Income Into Envelopes

Take a look at your income and divvy up how much is going to where and when. Most of the categories will be spent incrementally and in cash. Of course, things like rent and taxes will be paid at once so you have two options: keep the envelopes empty or place a check inside. 

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With that being said, the rest of the envelopes will need to have the necessary cash inside. For example, if you have budgeted $250 for groceries for the month, then place $125 from your paycheck. Or, if you’re going from a paycheck to paycheck basis and you have budgeted $300 for food until your next paycheck then insert $300 cash inside.  

Don’t touch! Every time you try to, slap your hand.

4. Use Money From Envelopes For Category

Going out to the movie theater? Going out for dinner? Buying some groceries? Take money from the related envelope. Quickly calculate how much is left and write it on the back of the envelope. If you have already run out of money from that category before the end of the month then you only have a handful of options: 

  • Do not spend any more funds on that category if it isn’t an emergency. We’re sorry: going to a Miley Cyrus concert isn’t a life or death situation, and neither is buying that $20 cheesecake to binge-watch Netflix. 
  • Scale back on your expenses; if you’re short by $20 on your groceries then put some stuff back. No, that chocolate bar won’t be necessary for dinner. 
  • Transfer money from one envelope to the other, but then you will have to spend less money in that category. This is highly dangerous and unadvisable as it can lead to the deterioration of the situation. 

This is what Dave Ramsey says when this happens to you

"You must remember that the very purpose of the envelope system is to curb your spending and teach you discipline. When you run out of grocery money, you eat leftovers instead of going food shopping. If you see your gas money is slipping away faster than the remaining days of the month, then limit your trips or even carpool."

5. Reward Yourself to Keep You Motivated

Here we go...the final day of the month has arrived and you’re shivering in your new moccasins worried about having zero funds in any of your envelopes. You go to open your entertainment envelope and you find $10. This makes you happy. You check your grocery envelope and you discover $25. You’re ecstatic. You look inside your automobile envelope and you see $15. Wow! That’s $50. Congratulations! This means you have come under budget for these categories in the past month. 

With this, you can celebrate. When participating in a budgeting system, it’s imperative that you reward yourself, within reason of course. You can go out to dinner, buy yourself a dress or keep the money until the next month. If you’re really good with money and you have improved fiscal discipline then you can place that money in your savings account (see below). 

Whatever you do, receiving the reward keeps you invigorated, excited and hopeful that you’re going to be turning around your life of financial irresponsibility into fiscal responsibility.

6. Pay Down Debt or Save Money With Extra Cash

Let’s say that altogether you have $200 in disposable income at the end of the month. You should use this money to either pay down your consumer debt - credit cards, line of credit, auto loans, payday loan and so on - or set money aside for a rainy day. Remember, you have to play catch up since you spent all of your previous funds at the local mall and food courts. This will help very much. 

7. Write Down the Advantages of the System

After a few months have come and gone, you should write down all of the advantages of the system so you can learn the benefits of it, and perhaps educate your friends on the matter. If you need help with that, well, we’ve got your back; here are just some of the positives of adopting the envelope budget: 

  • You will learn the concept of discipline and living within your means. 
  • You will understand the rules of money by using cash instead of plastic. 
  • You will waste less of your money unlike before. 
  • You will realize how important it is to start and maintain a monthly budget. 
  • You will never miss a bill payment again and pay late fees and interest. 

Moreover, you can problem-solve when you come across precarious situations. For instance, if you think envelope budgeting is unsecure then come up with ways to beef up security. Or, if you meet an unforeseen event, like the breakdown of your car, you have to find a way to pay for it without resorting to a credit card.

See Also: How to Improve Your Capital Budgeting Techniques 

No, you won’t be viewed as a caveman by your friends. You also won’t have to start acting as if you’re living in the pioneer days. The envelope budgeting system helps a lot more than many of those budgeting tools offered by financial institutions because you’re dealing with real money as opposed to digits. As the studies show, you’re more responsible when you’re seeing and holding those pieces of paper.

If you’re starting today then we will wish you the best of luck in your financial endeavors! 

Have you done the envelope budgeting system before? Let us know your experiences in the comments section below.

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