Using the Envelope System for Budgeting
Are you struggling to stay on top of your finances? Does it feel like you’re always spending more money than you have?
Is it just too easy to use your debit card and go over budget? Need a new system to stop over spending?
If so, you may be interested in learning about the cash envelope system. This system can help you take control of your spending and finally get ahead financially.
The cash envelope system is a way to budget your money. You put money into different envelopes for different things you need – like food, clothes and fun activities.
This helps make sure that you don’t spend more than you have and it’s great because then you know how much money you can use for each thing.
Keep reading to learn more about the using the envelope method for budgeting and just how it works….
Determine how much cash you need for each category of expenses
Figuring out your budget is like trying to do a 1000-piece puzzle: it’s overwhelming at first, but once you break it down into smaller pieces, it’s much easier to tackle.
The same concept applies when determining how much cash you need for each category of expenses; by budgeting every item, you’ll have an overall understanding of where your money should go.
First you need to have a budget plan that takes your fixed and variable expenses into account. When creating your budget, separate your fixed expenses from your variable expenses to make things easier.
Your fixed expenses are those that the amount does not change much if at all from month to month.
Fixed expenses are things such as:
Rent/Mortgage
Car Payments
Insurance
Loans/Debt
Utilities
Your variable expenses are those expenses that can change from month to month.
Variable expenses are things such as:
Groceries
Eating Out
Personal Care Items
Household Items
Entertainment
Most of the time people are overspending from their variable expenses categories, not the fixed.
Variable expenses are good place to start when deciding what categories your envelopes will be for.
Assign a dollar amount for each these categories that aligns with your budget and your goals.
Withdraw that amount of cash from the bank and divide it into envelopes labeled with each category
Once you have your budget all set up…now comes the fun part!
Withdraw that amount of cash from your bank, divide it up into labeled envelopes for food, clothes, entertainment, household goods, etc.
You are in control of what you label these and what category titles work best for you and your budget.
That way you’ll be able to track exactly what you’re spending each month – plus it can be kind of fun getting your own mini treasure trove of cash at the end of each month!
Label those envelopes with some colorful stickers or get creative with markers – there’s no wrong way to keep control of your financial priorities.
If your like me and pay all of your fixed monthly bills such as rent/mortgage, utilities, phone bill, etc directly from their bank accounts and may even have auto-pay features on to keep them on top of paying your bills on time.
If you do….great! You are ensuring your paying bills on time and have the money for your needs!
If that is the case, then just withdraw cash amounts for your variable monthly expenses such as, entertainment, food, clothes, household goods, etc. and make envelopes for those.
Then DO NOT touch the money in your bank account as that is all for fixed bills that will be paid electronically.
This can help divide you money into needs vs wants as well, giving you a better picture on where you can cut back or are over spending on.
When you make a purchase, pay with cash from the corresponding envelope
Making sure you don’t overspend starts with making smart decisions before the purchase – it’s mostly all over after the payment!
To help ensure sound financial management, consider embracing the envelope system, or divide what you have into various envelopes where each is designated for a certain purchase type.
Then, when you’re ready to make a purchase, pull out the cash that fits in with your corresponding envelope – no racking your brain trying to recall if you have enough funds in your budget – simply spend what is there!
This approach also makes it far easier to stay on top of how much you’re spending and hold yourself accountable for those purchases.
Plus…for some reason spending cold hard cash…makes it so much more real!
Keep track of your spending by writing down every purchase in your Budget Planner or on your computer/phone
When using the envelope method for budgeting, it is so important to write down and track exactly what you spent your money on.
You wont have the help of your bank statements to know, so its crucial your make note of it somewhere.
Whether you prefer physical or digital methods, there are so many different templates and spreadsheets to choose from that allow you to keep track of expenses quickly and easily.
Keeping track of your spending doesn’t have to be a tedious chore – there’s plenty of apps and tools out there that can make the task much easier!
Below are some tools I recommend for expense tracking:
- My Budget Planner
- Excel Spreadsheets
- Google sheets
A few apps that have expense tracking that I recommend are:
Once an envelope is empty, you can’t spend any more money in that category until you replenish it
Using the envelope method for budgeting is often one of the most recommended tips for money management.
The gist: treat your money like cash and assign each envelope to a specific type of expense – whether it’s rent, food, or those shiny new shoes you’ve been eyeing.
Once that envelope is completely empty, you can forget about spending any more in that category until you refill it.
But don’t worry, you won’t miss out on all the fun. Sticking to a budget has its own special kind of reward; imagine the satisfaction when you realize how much money you’re actually saving!
What if there is money left in an envelope at the end of the month?
So you get to the end of the month and what do you know?….there is some cash left in an envelope!
If this happens..first…give your self a pat on the back, hug, or a big high five! You were under budget this month!
Now you get to decide what your are going to do with your “extra” cash!
A couple ideas you could do would be:
You could put it in your emergency savings fund.
Put it towards saving for that vacation or big purchase you want.
Go ahead and put an extra payment towards paying down your debt.
Or keep it in the envelope so you have more for the next month.
Its pretty much up to you what you want to do with the savings you made!
So there you have it!
The cash envelope system in a nutshell. If you’re looking for a cash system that works, try using the envelope method for budgeting.
It might seem old-fashioned, but it’s tried and true. I hope this post has given you some insights into how the cash envelope system works and how you can use it to better manage your finances.
And if you need help getting started, Freed Ambitions has plenty of resources to get you on your way to budgeting success.
If the envelope method doesn’t seem right for you, check out the 50-30-20 budget!
If you’ve tried using the envelope method for budgeting, let me know the below in the comments!
Do you like it or dislike it? What do you find helpful about it? What other cash systems have you tried? Have any of them worked for you?
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