What is the Envelope Budget System?
The envelope budget system is a popular financial strategy that makes it easy to keep track of your spending and help you save. This strategy is sometimes called the ‘Dave Ramsey’s Envelope System’ because while people have been using envelopes to budget for decades, the method was made more popular by financial guru and radio host Dave Ramsey.
Traditionally envelope budgeting requires putting cash into physical envelopes but thanks to advancements in budgeting technology you can also set up digital envelopes which are more secure and just as effective.
The envelope budget system is most commonly used for budgeting for the home but it’s also a great way to create a small business budget.
In this article, we’ll explore the benefits of using the envelope budget system for your home and business and also give you clear, easy-to-follow instructions on how to get started.
Benefits of Using the Envelope Budget System
The envelope budget system has been used as a way to manage money for generations. It’s a simple strategy but it really works. Here are some of the key benefits of envelope budgeting.
Get a clearer sense of how you’re spending your money
Many of us don’t pay enough attention to how our money is being spent. By following the envelope budget system you’ll be forced to regularly take stock of your finances and see where you can make adjustments to your spending.
Easily save for the future
Envelope budgeting makes it much easier to save and plan for the future. A goo tip is to set yourself a savings goal, like a holiday or a new car and think about this goal everytime you’re tempted to cheat on your budget.
Practice discipline
We could all benefit from a little more discipline. This envelope budgeting system will help you practice being disciplined with how you spend your money and can also help you extend the same practice to other areas of your life.
Avoid spending money you don’t have
If you’re someone who’s always over-drawing your account or maxing out your credit card, the cash envelope system could be the perfect solution. With this system, you only spend the money you have set aside. This means no more overdraft fees or racking up credit card bills.
How to Use the Envelope Budget System for Your Home
The envelope budget system is a great way to get on top of your personal spending. You’ll be surprised by how much you can save when you’re paying attention to where your money is going. Here are some easy steps to get you started.
1. Review your home expenses and divide them into categories
Before you set up an envelope budget system for your home, you’ll have to sit down and take stock of your expenses. Start by estimating your fixed expenses. These are regular payments that don’t change month to month like utilities, mortgage, and insurance. You’ll also need to figure out how much you’re putting towards other expenses like groceries, gas, and entertainment.
2. Set limits for each category
Once you have a list of categories you’ll need to set a spending limit for each category based on your monthly income. If you’re a little unsure of how to divide your money, a good place to start is by using a 50/30/20 budget. 50% of your monthly income should go towards ‘needs’ like rent and groceries. 30% should go towards wants like going out and travel. The final 20% should go to savings. The ultimate goal of budgeting is to help you save, so you want to be making sure you’re putting something away for the future.
3. Set up envelopes
If you’re using the traditional cash envelope system, you’ll have to withdraw cash after figuring out how much you need for the month. Put that money into envelopes with the intended use written on the front. If you choose to use digital envelopes you’ll need a bank account or budgeting app that lets you have free, preferably unlimited sub-accounts (these can also be called buckets, pots, or envelopes depending on the product you use).
4. Review and adjust every month
Don’t be discouraged if you have to make adjustments after the first month, that’s all part of the process! The idea of the envelope budget system is to work towards having a clear and consistent budget that you are able to stick to every month, but this likely won’t happen right away.
How to Use the Envelope Budget System for Your Business
Using the envelope budget system for your business can help you better understand your expenses and how you spend your business’s income. Having a clearer idea of your finances will allow you to plan for the future and help you grow your business. Follow these simple steps to start using the envelope budget system for your business.
1. Review and categorize your business expenses
Like with the home, every business has different monthly expenses. The first step is to categorize these costs. This will mean looking over your spending from the previous year and breaking these costs down into categories. Start with your fixed expenses. These are the expenses that don’t change month to month. For example, if your business is a small restaurant, your fixed expenses will include things like, rent, insurance, and utilities. The other expenses are called variable expenses which include stock, maintenance, and payroll.
2. Set spending limits
For each category, you will need to decide on a spending limit. The idea is to only spend what is necessary for that category the remaining money is your profit.
3. Set up envelopes
Once you know what you’re going to spend money on and how much you want to spend it’s time to set up your envelopes. When it comes to your business, we recommend you set up digital envelopes rather than physical envelopes. NorthOne’s Envelope feature lets you set up an unlimited number for free.
4. Separate your funds
Once your envelopes are set up, you’ll need to allocate money into these envelopes based on set spending limits for each category. NorthOne’s Envelope feature lets you set aside money automatically on a schedule. This will save you having to manually divide your income into each envelope every month.
5. Spend from your envelopes
Use the money in each envelope to make payments related to that category. At the end of the month you’ll review your spending and make adjustments to your envelope budgets where necessary.
Tools for Envelope Budgeting
For Home Budgets
If you’re going to use the cash envelope method for your home budget, all you really need is some envelopes that you can write categories on. For something a little more official, you can find a variety of envelope budgeting products on Etsy. If you’d prefer to go digital with your budgeting there are plenty of personal budgeting apps available including Goodbudget and Mvelopes.
For Business Budgets
If you want to try the envelope budget method for your business, we recommend opening a NorthOne account. NorthOne’s Envelope feature was specifically built to help small business owners budget and organize their money. You can set up unlimited Envelopes for each expense category. This feature also lets you set up rules to separate a set amount of money automatically on a daily, weekly, or monthly schedule.
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The Envelope Budget System is a popular financial strategy that helps individuals and businesses track their spending and save money. It is sometimes referred to as the "Dave Ramsey's Envelope System" because it was popularized by financial guru and radio host Dave Ramsey. The traditional envelope budgeting method involves using physical envelopes to allocate cash for different spending categories. However, with advancements in budgeting technology, digital envelopes can also be set up for a more secure and effective approach.
Benefits of Using the Envelope Budget System:
- Get a clearer sense of how you're spending your money: The envelope budget system forces you to regularly assess your finances and identify areas where you can make adjustments to your spending habits.
- Easily save for the future: This budgeting method makes saving and planning for the future much easier. Setting specific savings goals, such as a vacation or a new car, can help you stay motivated and avoid overspending.
- Practice discipline: The envelope budget system promotes discipline in spending and can extend to other areas of your life as well.
- Avoid spending money you don't have: If you tend to overdraw your account or max out your credit cards, the cash envelope system can be a solution. By using this system, you only spend the money you have set aside, eliminating the risk of overdraft fees or accumulating credit card debt.
How to Use the Envelope Budget System for Your Home:
- Review your home expenses and divide them into categories: Start by estimating your fixed expenses, such as utilities, mortgage, and insurance. Determine how much you allocate for other expenses like groceries, gas, and entertainment.
- Set limits for each category: Based on your monthly income, establish spending limits for each category. A common approach is the 50/30/20 budget, where 50% of your income goes towards needs, 30% towards wants, and 20% towards savings.
- Set up envelopes: If you prefer the traditional cash envelope system, withdraw the necessary cash for each category and label the envelopes accordingly. Alternatively, you can use digital envelopes provided by budgeting apps or bank accounts with sub-accounts.
- Review and adjust every month: Making adjustments to your budget is a normal part of the process. Aim for a clear and consistent budget that you can stick to each month, but be prepared to refine it as needed.
How to Use the Envelope Budget System for Your Business:
- Review and categorize your business expenses: Categorize your monthly expenses, starting with fixed expenses that remain constant. For example, a small restaurant's fixed expenses may include rent, insurance, and utilities. Identify variable expenses like stock, maintenance, and payroll.
- Set spending limits: Determine spending limits for each category, ensuring that you only spend what is necessary. The remaining money can be considered profit.
- Set up envelopes: Use digital envelopes, such as those provided by business budgeting apps or bank accounts with envelope features, to allocate money for each expense category.
- Separate your funds: Allocate money into each envelope based on the set spending limits for each category. Some budgeting apps allow for automatic allocation on a schedule, saving you from manually dividing your income each month.
- Spend from your envelopes: Use the money in each envelope to make payments related to the corresponding category. At the end of the month, review your spending and make adjustments to your envelope budgets as necessary.
Tools for Envelope Budgeting:
- For Home Budgets: If you prefer the cash envelope method, you can simply use envelopes and label them with different spending categories. Alternatively, there are personal budgeting apps available, such as Goodbudget and Mvelopes, that offer digital envelope budgeting.
- For Business Budgets: It is recommended to open a NorthOne account, which provides an Envelope feature specifically designed for small business owners. This feature allows you to set up unlimited envelopes for each expense category and automate the allocation of funds based on your set spending limits.
Remember, the envelope budget system is a flexible and effective way to manage your finances, whether it's for personal or business purposes. It helps you gain a clearer understanding of your spending habits, save for the future, practice discipline, and avoid overspending.
