What Do Envelopes Have To Do With Effective Budgeting?

These days, when we think about tools that help us budget more effectively, we think about apps and software to churn out numbers instantly. So used are we today about these technologies that it won’t be surprised to find people forgetting what a piggy bank is.

And here we have the classic envelope budgeting system waiting for you to exploit. It is the simple process of categorizing your expenses using envelopes and putting cash in them. The money in each envelope will then only be used for that category of expense.

It’s not as if you put a curse on the envelopes that make it so effective. But it probably has something to do with seeing cold hard cash being categorized that has an effect of people.

It is so easy to go over your limit when you are charging everything to your credit card. You don’t give a second thought when swiping your card. But visually seeing your pile of cash notes dwindling can be a great deterrent that helps you give second thought on spending money.

Here’s how to do it in 6 steps

Categorize your expenses. You can have as many categories and sub-categories as you want. Just label them on separate envelopes clearly. And don’t have any categories that overlap each other. This is because you want to be able to easily classify expenses into a category with little trouble.

Put your money in. Once you are done with your categorization, it is time to set aside how much you are going spend on each category this month. This means that if you have budgeted $500 on food, put $500 into that envelope. Write “$500” on the back of the envelope. You will then draw out money from it whenever you need to buy food.

Spend as per your plan. Every time you spend money from any envelope, write down the amount of money you used on the back of the envelope. Keep the receipt and whatever change back into the envelope. This way, you will slowly internalize the habit of accountability.

No extra withdrawals when you run out. If you are going to really immerse yourself into your budgeting plan, it is best not to spend more than what is available in the envelopes. This can be tough especially your credit cards are crying out for attention in your wallet. But if you have run out of money for food, you will be a fool to starve yourself just to keep within budget. In this case, use money from leftovers from the other envelopes. See it as a punishment if you want. The important thing is that you are learning to budget and internalizing accountability.

Leftovers are rewards. There are basically a few things you can do with what is left at the end of the month. You can choose to save the extra cash in your savings account, use them to pay off some of your debt, or use it to reward yourself for following through successfully with the envelope budgeting system. It’s an awesome method isn’t it?

Rinse and repeat. Remember that this exercise is not meant to force you into spending less. It is just a budgeting method to avoid overspending on things you do not need. So if you find that you did not have enough money in the previous month, adjust your new budget upwards. Go downwards if you find that you had too much to spend. Then repeat the process all over again.