One of the easiest ways to track your spending is to switch to an envelope budgeting system. While this may seem like a trendy new way to manage your daily budget, it's actually a system that's more than 100 years old. Most likely, your grandparents used this system or one similar to it.
Here's how it works: You divide up all your discretionary spending into envelopes by category. So one for eating out, one for groceries, one for clothing, one for miscellaneous spending, etc.
Generally, you would not pay your bills via this system; rather, you'd continue to pay them out of your checking account via direct debit. However, to make the envelope system work for you, you should stop spending stop using your checking account except to pay bills.
Read on for other tips and tricks on how to make an envelope budgeting system work for you.
Decide the Categories You Will Switch to Cash
Before you start the envelope budgeting system, you'll need to create your budget. Then you will need to determine which categories you are going to switch to the envelope system. Pro tip: these categories should be any line items that involve discretionary spending.
Common categories that are used are groceries, eating out, gas money or cab fare, entertainment categories, fun money, clothing costs, and household expenses.
Withdraw the Cash at the Beginning of the Month
The next step is to add up your discretionary spends and make a withdrawal at your bank for the total. Generally, it is best to write a check and request the required denominations you need for each category. For example, if you're allocating $25/month for household items, you'll need a twenty and a five dollar bill in that envelope. Remember, no "borrowing" from other envelopes!
Organize Your Envelopes for Each Category
Then, you'll label your envelopes with the categories and monthly allotted spend, then put the correct amount into each envelope. Find a safe place in your home to store your envelopes, and remember not to carry them with you at all times.
While it's never a good idea to carry a large amount of cash, you may want to get into the habit of carrying $20 in cash with you at all times to cover unexpected expenses or any potential spends at a cash-only business.
Take the Envelopes With Your When You Shop
When you goshopping or to have fun, take money from the appropriate envelope. You do not want to take the whole amount with you, because you will be more likely to spend it all. This is especially true for your food and entertainment categories. So take what you'd like to spend on that particular outing, then when it's gone, it's gone.
Afterward, put the receipts in the envelopes so that you can track your spending at the end of the month. This may help you notice spending issues and identify problems areas, such as shopping or eating out.
Stop Spending Money as You Run Out of It
The most important takeaway with the envelope budgeting system is that when you run out of money for one particular envelope, you have to stop spending in that category. This is why this budgeting system is so impactful –it helps you stick to your budget without running out of money each month.
Another plus, if you consistently run out of money in one envelope each month, that may show you that you have a budgeting or spending issue in that category.
Roll Left Over Money to the Next Month
If you have money leftover in the categories, you can choose to roll it over into the next month. This may work for some categories like groceries, so that you can stock up where there is a good sale or when you are saving up for something more expensive.
You may also splurge with extra money, use it to pad your emergency fund, or put it toward one of your long-term financial goals.
Other Tips:
- Divide some categories into weekly amounts. You can create sub-envelopes for weekly expenses so you do not spend all of your money at the beginning of the month. This works especially well for categories like your groceries. This way you know you will have some money at the end of the month so you are not just eating ramen.
- There are benefits to spending cash. People tend to spend less when they must count out the cash when shopping, while they tend to overspend if they know they are using a credit or debit card. You may find that your spending goes down when you are using this method.
- Shop with a specific list and estimate your costs before you go into the store. In addition to a shopping list. you can use the calculator on your phone to track what you have spent. This can help you stick your budget, especially on big shopping trips like the grocery store or when you go to a bulk store to stock up on supplies. You can estimate the costs of the items on the list before you go to the store to help you stay on track.
- Consider using a billfold or coupon organizer for your cash. If you do not want to carry around envelopes, these are good alternatives. You can find them in office supply stores.
- Leave your cards at home. If you know you will be tempted to dip into your checking account when you are shopping, leave your cards at home. This will force you to pay more attention to your spending when you are at the store. You can use the calculator on your phone to track your total before you get to the checkout.
Updated by Rachel Morgan Cautero.
Expert Introduction
I am an expert in personal finance and budgeting with extensive knowledge and experience in various budgeting systems, including the envelope budgeting system. Over the years, I have helped numerous individuals and families effectively manage their finances by implementing this tried-and-true budgeting method. My expertise is backed by first-hand experience in using the envelope budgeting system, as well as a deep understanding of its principles and practical applications.
Envelop Budgeting System Concepts
The article you've provided discusses the envelope budgeting system, a method that has been around for over a century and remains a powerful tool for managing personal finances. Here are the key concepts and practices outlined in the article:
Envelope Budgeting System Overview
The envelope budgeting system involves dividing discretionary spending into specific categories and using physical envelopes to allocate cash for each category. It helps individuals track their spending, avoid overspending, and gain better control over their finances.
Categories for Envelope Budgeting
Common categories for the envelope system include groceries, eating out, gas money or cab fare, entertainment, clothing costs, and household expenses. These categories should cover discretionary spending items and exclude regular bill payments.
Cash Withdrawal and Envelope Organization
At the beginning of the month, individuals calculate their total discretionary spending, make a cash withdrawal from the bank, and organize envelopes for each spending category with the allocated amount of cash. The envelopes should be labeled with the categories and monthly allotted spend.
Carrying Envelopes When Shopping
When shopping or engaging in activities that involve spending, individuals should take money from the appropriate envelope. It is advised not to carry the entire amount to avoid overspending. Receipts should be placed in the envelopes to track spending and identify potential issues.
Spending Limitation and Rollover
Once the allocated money in an envelope is spent, individuals must stop spending in that category. Any leftover money can be rolled over to the next month, used for savings, or allocated to long-term financial goals. This helps in sticking to the budget and identifying spending issues.
Additional Tips
Dividing some categories into weekly amounts, using cash to control spending, creating specific shopping lists, leaving cards at home, and utilizing tools like billfolds or coupon organizers are additional tips to enhance the effectiveness of the envelope budgeting system.
The envelope budgeting system provides a practical and tangible way to manage personal finances, promote responsible spending, and achieve financial goals. Its simplicity, effectiveness, and adaptability make it a valuable tool for individuals looking to take control of their financial well-being.
