Envelope Budgeting 101: How to Manage Your Money Like a Pro

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In today’s fast-paced, digital world, the age-old envelope budgeting system is making a surprising yet powerful comeback. Rediscovered by a new generation on social media platforms such as TikTok, this tried-and-true method offers a tangible approach to managing finances with a modern twist.

Whether you're dealing with physical cash or leveraging the latest budgeting apps, envelope budgeting provides a straightforward, effective way to oversee your spending and savings.

In this comprehensive guide, we'll explore the nuts and bolts of envelope budgeting, how it fits into the digital era, and why it might just be the strategy you need to transform your financial management.

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What is the envelope budgeting system? And how does it work?

Basically, you use budget envelopes to keep track of your money and divide it into different expenses or spending categories. You can include everything from all your expenses to just savings goals.

Probably the simplest is to use this type of budgeting to manage money after your fixed expenses are paid. Fixed expenses would be items like rent or mortgage, car loans, and insurance payments, as well as utilities and other expenses that do not vary much.

You then take out all leftover money and divide it into your spending categories or envelopes that are dedicated to certain expenses. You either pay cash for those expenses or deposit all the money into your bank and pay from there.

Since this is the 21st century, there are also mobile apps for envelope budgeting. This eliminates the need to have lots of physical cash just sitting around!

The Pros And Cons Of Using Cash Envelopes For Budgeting

As with any budgeting method, there are pros and cons. This system may not work for everyone or for all families.

Pros of cash envelopes

• Plan the month ahead of time - envelopes make you decide where and how to spend leftover income each month.
• Sticking to the limits forces you to now overspend - it does take discipline, making this both a pro and a con
• Encourages you to "pay yourself first" by setting aside savings
• Effective as long as you do not resort to using credit cards as a backup
• Can be an emergency fund - although you then need to restrict your spending
• Spending becomes something you can see and touch - unlike the credit card "buy now, pay later" mindset
• No more overdraft fees!
• More likely to spend mindfully (studies show that people spend 10 to 15% less when they use cash)
• Hopefully, there are no more forgotten bills!
• Limits impulse purchases

Cons of cash envelopes

• Doesn't work with online bill paying or purchases unless you use an app
• Must carry cash or be disciplined enough to use an app
• As with all budgets, it requires time and effort
• May not work with partners or may require a lot of communication
• If you run out of money before the next payday, you are out of money - no cheating with credit cards to make it to the end of the month
• Bank or ATM runs are not always convenient
• Allocating expenses from envelopes can be time-consuming, especially if you shop at a big box store and buy, say, groceries and clothing at the same time

How To Use The Cash Envelope System For Budgeting

If you want to try the envelope system, you will need to work through several steps as outlined below.

Step 1) Write down where all your money is going - you may need to collect receipts, especially for cash purchases.

Step 2) Write down all your sources of monthly income.

Step 3) Determine your fixed or constant monthly expenses.

Step 4) Subtract those expenses from your income - you now have how much money you have to spend on items like:

• Groceries
• Entertainment
• Dining out
• Gas
• Clothes
• Personal care items
• Miscellaneous
• Savings
• Debt reduction
• Future purchases

If for some reason, there is no leftover cash, you need to cut some expenses!

Use The Cash For All Your Monthly Expenses

Step 5) Determine where you will spend your money left at the end of each pay period. You should have an idea of how much you spend in different categories from Step 1.

Set Up Your Envelopes

Step 6) Set up the envelopes. Label each one and put the dollar amount you expect to need each month into the corresponding envelope. Some people use small accordion files instead of envelopes.

Assign Budget Amounts to Each Envelope

Step 7) Take out the unspent money for each paycheck and prioritize how much money is going into each envelope. If you do not have enough, you need to cut those expenses.

Spend the Cash in Each Envelope

Step 8) Use the money as budgeted. Remember, you do not need to spend ALL of each category and you should pay yourself a bit each month towards financial goals.

Step 9) Any leftover cash can be rolled onto the next month or better yet, out into a savings account or to pay down debt.

Track your spending

Step 10) Last but not least, adjust your budget as needed.

You can also use this system for all your monthly expenses but this can be annoying to run to the bank to deposit money.

Using the envelope budget system with mobile banking

The digital approach is to use an envelope budgeting app, especially if you transact most of your financial business online.

Some allow you to link with your financial institutions, others require you to enter each bill by hand.

The Pay Yourself First Method

Regardless of which budgeting system you use, paying yourself first is one of the most important steps you can take. Ideally, you set aside a percentage of each paycheck into a savings account.

That money can then be divided into future purchases, emergencies, vacations, retirement, or other savings.

Some employers will allow you to have your paycheck split with a percentage going directly into savings.

Once you have enough money saved up, transfer it to different accounts such as an IRA for retirement or an online savings account for emergencies. You'll get better returns, save money and be less likely to spend it!

If you cannot set aside money before all your bills are paid, roll any leftover money into savings.

Alternatives to the envelope budget system

If you don't feel like having cash unsecured in your home, consider using gift cards. Use different gift cards for different categories.

Look for gift cards without fees or expiration dates. Ones that can be reloaded are great.

Prepaid debit cards are a similar option.

Set up different bank accounts or sub accounts for different types of purchases.

Track spending after every purchase to see how much cash remains in each category.

Adding it all up: Is envelope budgeting right for you?

This depends on your self-discipline and that of your partner. It is worth trying for a few months to see if it will work if you are single, or having a written plan if your partner is willing to try.

The security of your cash is another factor. If you are robbed or a household member is stealing from you, you will never recover that money.

Budgeting, no matter the method, takes time. If you make the effort and set aside time, it will pay off in the long run.