The Envelope Budget

Updated on March 23, 2019

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The envelope budgeting method has been around for decades but is often overlooked. Although this method isn’t as popular as others, it is an easy way to get in control of your money and stop overspending. Unlike debit and credit cards, the envelope budget uses cash to tell you exactly when to stop spending money. This key distinction could be the saving grace for your budget. Let’s get Whyze and see how it works.

How Does The Envelope Budget Work?

1. Figure Out Your Monthly After-Tax Income

The first step is figuring out your monthly income after taxes. If you get paid on a weekly or bi-weekly basis, you’ll have a do a little calculating. If you’re paid weekly, simply take your weekly after-tax income, multiply by 52, then divide by 12. If you’re paid bi-weekly, simply take your bi-weekly after-tax income, multiply by 26, then divide by 12. This is a simple way to get a rough estimate of how much income you take home each month.

If you’re paid on an irregular basis like commission-based incomes, you’ll want to use a number that reflects a low earning month. This will make sure your budget isn’t doomed from the start.

2. List Your Expense Categories & Set Spending Limits

Next, you’ll need to figure out your expense categories. These will be things like food, transportation, and rent. Once you have your expense categories, you’ll want to set spending limits for each one. For instance, $300 for groceries or $60 for transportation. Remember to make sure the sum of these expense categories does not exceed your monthly income.

3. Create An Envelope For Each Category & Fill It With Cash

After you have your list of expense categories and their spending limits, you’ll want to use real cash from your paycheck to fill the envelopes. Although stuffing cash into an envelope sounds old school, it’s a great way to hold yourself accountable. Once the money from the envelope is gone, you have to stop spending.

As an example, if you budgeted $300 for groceries, you’ll need to make an envelope labeled “Groceries” and insert $300 cash into it. Each time you visit the grocery store, take your envelope and use this cash only. Once the $300 is spent, you’ve met your limit for groceries that month!

4. Time To Budget

Once you know your monthly income and have made your envelopes, you're ready to put the envelope budget into action. As you spend money throughout the month, make sure you resist the temptation to borrow from another envelope after you’ve emptied one. This will completely defeat the purpose of the envelope budget. At the end of each month, feel free to analyze how well you stuck to your budget and make any spending limit adjustments if necessary.

Also, if you have money remaining in any of your envelopes at the end of the month, roll this money into next month’s budget, invest it, or reward yourself with something nice!

Using This System In A Technology-Driven World

So you may be wondering “what if I pay some of my bills online?” While the envelope budget is most powerful when using cash, you can still make it work if you pay some of your expenses online.

In order to still use this method, you’ll have to choose one of the following options. You can choose to either make envelopes only for offline expenses or you can choose to create envelopes for these online expenses. If you choose to create envelopes for your online expenses, write these spending limits on envelopes and make sure not to spend more than what you’ve written.

As your expenses are paid directly from your bank account or online, make sure to keep track of how much you’ve spent by writing it on the envelopes. This won’t be as painful as spending your hard earned cash, but it will still require you to be accountable.

Key Takeaway

Regardless of whether you pay expenses in-person, online, or a mix of both, the envelope budgeting method is a simple way to hold yourself accountable and prevent overspending.