What is the Envelope System?
It is a system for dividing your monthly or weekly budget into different paper envelopes. Each envelope is assigned to a specific category and is aimed at managing discretionary spending.
How to Set Up a Budget Using the Envelope System
Learning how to budget using envelopes is not difficult, even if you have never created a budget before. It is very similar to creating any other type of budget, with a special twist. Here is a list of some steps to get started:
1. Identify Budget Categories and Assign an Envelope for Each Category
The first step in using the envelope system is identifying the expenses that will be included in the envelopes. This part of the process is personal – you tailor each envelope according to your budget and your expenses.
The labels on your envelopes may include general categories such as groceries, fuel, clothing, entertainment, and savings, for example.
2. Allocate Cash for Each Envelope
Once you have envelopes for the expenses you want to manage, decide how much money goes into each envelope. This should be easy to do if you have already calculated your income for the month, then subtracted the amounts you need to set aside for your fixed expenses. If you have not done this yet, stop and complete this task.
If you get paid weekly or bi-weekly, you may need to consider budgeting on a weekly basis.
Let’s take a look at the previous ideal envelope list. It assumes you have a total of $1000 to fill those envelopes for the month. The allocation may look like this: groceries $400, fuel $150, food $100, clothing $100, entertainment $50, gifts $25, savings $25, personal care $50, totaling $1000.
The total of the envelopes should reflect the total cash you have to allocate.
On the front of the envelope, write the initial amount you have to spend in that category.
3. Withdraw Cash to Fill Your Envelopes
In this step, withdraw the cash you need to fill your envelopes. In fact, you may want to add the cash you need to each envelope at the beginning of the month. Then, throughout the rest of the month, pull money from the relevant envelope when you need to make a purchase in that category.
If you plan to withdraw cash for your envelopes from an ATM, check the maximum withdrawal limit at your bank first. You may need to visit the branch instead to get the full amount you need. If you do not have enough money in your account for the month, set up a weekly envelope system.
Note: Keeping large amounts of cash in envelopes at home can pose a risk of theft or loss; the envelopes should be stored in a safe place. Additionally, do not pay bills by sending cash through the mail.
4. Track Your Expenses in Each Envelope
If you have distributed cash into your envelopes, you are ready to start spending money for the month.
To make the system work, keep track of how much money you have left to spend in each category. Each time you withdraw money, subtract it from the amount to get your total remaining cash. Take the envelope with you when shopping, or if you do not have time to jot down how much money you pulled from the envelope before making a purchase, store the receipt and refer back to it later.
Using the Envelope System with Credit or Debit Cards
It may be challenging to use the envelope system if you pay all your expenses using a debit card or use a credit card that you are trying to pay off monthly. If you primarily use credit or debit cards, there are apps and websites that operate on a virtual envelope method, like Mvelopes.
Or
You can create your own system in the following way: Define budget categories and assign an envelope for each category. Write on each envelope the amount you intend to spend for the month. Always ask for or before receipts when using your card, and add the receipts to the envelope at home. Write the receipt amount on the correct outer envelope to keep track of total expenses. Do not spend more than the amount you assigned.
Conclusion
The envelope system isn’t too difficult; just spend the amount in each envelope. Once the money in a specific envelope runs out, it is gone for the month. You cannot spend more in that category until the next month starts or you use other envelopes. The purpose of using envelopes in budgeting is to remain in control of what you spend. If you are spending more than you have, change your spending pattern or your budget.
Remember, you don’t have to spend every envelope down to zero each month. Remaining money means you spent less than you planned. Paying off debts or adding the remaining money to your emergency fund. Giving any extra dollar a goal helps ensure that money isn’t wasted.
Source: https://www.thebalancemoney.com/how-to-budget-using-the-envelope-system-4783268
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