The envelope budgeting system is one of the easiest ways to track your spending. Although this may seem like a new and trendy way to manage daily budgeting, it is actually an old system that dates back over 100 years. It’s likely that your grandparents used this system or a similar one.
Decide on the categories you will convert into cash
Before you start with the envelope budgeting system, you will need to create your budget. Then, you will need to identify the categories that you will convert to the envelope system. Important tip: these categories should include any items that involve discretionary spending.
Withdraw cash at the beginning of the month
The next step is to gather your total discretionary spending and withdraw it from the bank. Generally, it’s best to write a check and request the specific denominations you need for each category. For example, if you allocate $25 per month for household expenses, you will need a $20 bill and a $5 bill in that envelope. Remember, do not borrow from other envelopes!
Organize the envelopes for each category
Next, label the envelopes with the categories and the budgeted amount for each month, then place the correct amount of money in each envelope. Find a safe place in your home to store your envelopes, and remember not to carry them with you at all times.
Take the envelopes with you shopping
When you go shopping or out for enjoyment, take cash from the appropriate envelope. Do not take the entire amount with you, as you are more likely to spend it all. This is especially true for food and entertainment categories. So take what you want to spend on this particular outing, and when it runs out, it runs out.
Afterward, place the receipts in the envelopes so you can track your spending by the end of the month. This may help you discover spending issues and pinpoint problem areas, such as shopping or dining out.
Stop spending when the cash runs out
The most important takeaway from the envelope budgeting system is that when the cash in a specific envelope runs out, you must stop spending in that category. This is why this budgeting system has a significant impact – it helps you stick to your budget without running out of money each month.
Roll over any remaining money to the next month
If you have leftover money in the categories, you can choose to roll it over to the next month. This may be suitable for some categories like groceries, so you can stock up when there’s a good sale or when you’re saving for something more expensive.
You can also enjoy the extra money, use it to boost your emergency fund, or direct it towards one of your long-term financial goals.
Other tips:
– Break some categories down into weekly amounts. You can create sub-envelopes for weekly expenses so you don’t spend all your money at the beginning of the month. This works especially well for grocery categories. That way, you will know you have some money left at the end of the month, so you’re not forced to eat ramen only.
– There are benefits to spending cash. People tend to spend less when they have to count cash while shopping, while they tend to overspend if they know they are using a credit or debit card. You may find your spending decreases when using this method.
– Shop with a defined list and estimate your costs before you go to the store. Besides a shopping list, you can use the calculator on your phone to track what you might have spent. This can help you stick to your budget, especially on big shopping trips like grocery stores or when you go to a wholesale store for supplies. You can estimate the costs of items on the list before you go to the store to help you stay on track.
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You might consider using a wallet or coupon organizer for your cash. If you don’t want to carry the envelopes with you, these are good alternatives. You can find them at office supply stores.
– Leave your cards at home. If you know you’ll be diving into your checking account while shopping, leave your cards at home. This will force you to pay more attention to your spending when you’re in the store. You can use the calculator on your phone to track the total amount before you check out.
Updated by Rachel Morgan Cotero.
Source: https://www.thebalancemoney.com/how-to-set-up-an-envelope-budgeting-system-2385693
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