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Envelope Budgeting

I think you would agree:

Money’s tight.

Everyone needs help saving money. You’re not alone in this. Many people are looking for better ways to save money. However, it has become hard to even make money, let alone save it. Fortunately, there is a way to save money that can be surprisingly effective. This is called envelope budgeting.

Envelope budgeting is an effective way to save money for people because it helps you accomplish two things:

  1. It helps you budget money into categories.
  2. It forces you to limit your spending in those categories.

The nicest part of envelope budgeting:

It’s dead simple. In this article, we’ll cover a few easy steps to get you on your way to saving money wisely using the envelope budgeting system along with one really awesome tip at the very end.

How Envelope Budgeting Works

Envelope budgeting has been around forever, but its popularity was re-kindled by Dave Ramsey when the world woke up one day and realized we were all in debt up to our eyeballs and needed learn how to make a budget. Below are the basic steps to understanding how envelope budgeting works.

Step 1: Choosing your envelope categories

The envelope represents a category of spending for you.

It could be something broad like “food” where the money is for groceries and dining out or you could use a more specific category like “dining out.” Here are some other category ideas you could use for your envelopes:

  • Shopping
  • Clothing
  • Personal Care / Pampering
  • Entertainment
  • Groceries
  • Restaurants
  • Coffee
  • Fast Food
  • General Casual Spending

Pretty much, any area in your life where you have costs that fluctuate, you can usually control with envelope budgeting.

Step 2: Putting money in your envelopes

The next step is to fill your envelopes with money. It’s easiest to do this after pay day, but if you have the ability to start now, then sooner is better than later.

The hardest part of this step is being realistic but also responsible. What’s the minimum amount of money you think you can get by with? If you don’t put enough in, will you have the discipline to say no? You must do your best to commit to whatever amount you put in your envelope.

Expert Tip: Use your bank statements or Mint.com to help you figure out your spending for a certain category. For categories with a lot of fluctuation, like shopping, I use a 12 month average. Also, check out our review of EveryDollar and Mint.com if you want to see the differences between these two budgeting platforms.

Step 3: Spending your money and saving it at the same time

Once you have your money allocated to the envelopes, the next step is using it. If you’ve been swiping credit or debit cards most of your life, then it can be a hard habit to break. Always remember to get your envelope ready when you’re about to spend money.

Expert Tip: I love to write the amount of money I put in the envelope on the outside, and as I spend, I subtract the amount on the envelope like it’s a ledger. This way, you always know exactly how much you have in your envelope.

Respect your categories! Your grocery money shouldn’t be used for shoes. Don’t borrow money from other envelopes either. Once you do that, you’ve ruined the whole idea behind this budget. The idea is that when you run out of this type of money, then you have no more money to spend.

If you notice a drastic issue with the amount of money, then try to adjust it next month if at all possible. You’d be surprised at what you can accomplish if you are consciously spending your money rather than mindlessly swiping cards until they decline.

Envelope Budgeting Explainer Video:

Other Twists on the Envelope Budgeting Method

Budgeting by Paycheck

Let’s say you get paid twice a month and each month you want to only spend $400 on groceries. Instead of taking $400 out of your paycheck and using that over the whole month, why not take out $200 and use that for the first 2 weeks, then when your next paycheck comes in, you can take another $200 out for the next 2 weeks? There are many variations you can use, just make sure it works for you.

Money Leftover: What do I do with Leftover Money?

Inevitable, if you are doing things well, you’ll be left with extra money at the end of the month. Many people wonder what they should do with it. There are 2 things you can do:

Roll the money over to the next month

You can leave the money in the envelope and have more money for that category next month. This is nice because it will give you breathing room for unforeseeable fluctuations. I wouldn’t suggest this for frivolous categories like “shoe shopping”, but categories like “groceries” might be good.

Save the Money: Mission Accomplished

The other option is to take the excess money and put it into savings. I mean, that’s one of the goals of budgeting: saving money! Start stacking that extra cash away for a rainy day.

What if I Always Have a Lot of Money Leftover?

If you find yourself with a bunch of extra money leftover in an envelope category each month, then try lowering the amount. The other alternative is that perhaps you need a broader category. Having a cappuccino category, a latte category and an espresso category might be getting a bit too specific.

Budget Money, but Not Like You’re a Robot

Remember: there is nothing wrong with having some money set aside for fun. You’re a human, not a robot. Every now and then you can treat yourself within reason. You can take yourself or your family out to eat something. However, you have to be careful not to go beyond the amount budgeted.

Always budget with this in mind. If you can be disciplined enough to strictly budget and tolerate a drastically lowered quality of life, then great, but try to maintain your sanity at the same time.

What is the Purpose of Envelope Budgeting?

We have the internet, smartphones and apps. What purpose could envelope budgeting possibly serve? Envelope budgeting does something that advanced technology can’t do: unplug you.

It limits your access and forces you to only use what’s in the envelope. Can you get around it? Sure, but it’s so much more obvious when you’re breaking the budget. Don’t get me wrong, I love Mint.com (check out my Mint.com Review), but Mint can’t stop you from over spending, it will just let you know that you did.

The core philosophy of envelope budgeting is that if you can’t pay cash for it, then you shouldn’t buy it. The envelope budgeting method is designed to help you fight the need to spend beyond your means.

How can Envelope Budgeting Help Me?

Envelope budgeting doesn’t just help you save money. It helps you organize your spending and see where your money is going. Envelope budgeting forces you to only spend the money you’ve allocated and no more. It trains you to use only money that you have, rather than allowing you to borrow money from banks by using credit cards. It teaches you that you must save for things that you don’t currently have enough money to purchase.

Envelope Budgeting to the Extreme

As promised, here’s an awesome tip for envelope budgeting. Envelope budgeting does many things for you in terms of controlling your spending, but do you know what one of the best things you can do with your newfound cash flow control is? Eliminating debt. Take the money you’ve saved and pay off any high interest debt that you have.

This will save you money on interest and free up your cash once you’ve paid those debts off. Then you’ll have even more money to budget with! Have you used envelope budgeting? Share your stories with me in the comments.

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