The Envelope Method: An Old Trick for Budgeting

That May Save Your Finances

This post goes live in collaboration with guest contributor, Alex Bill.  Thank you for your great work

A good bargain is something we all love. However, when it comes to budgeting, some find it tough. We start our New Year with the resolution to stick to our budget and save as much as we can. But the majority of the time we fail and fall back into our old habits. We create budgets hoping that it will keep us from overspending but when it comes to actually sticking to it, we chicken out. Have you ever wondered why that happens? It’s because we create a budget to deny ourselves. That’s no fun, right?

If you really want to stick to your budget, you need to make it flexible. You need to balance both discipline and incentives to create a budget that is easy to stick to. Since everyone has different lifestyles, needs and preferences, there isn’t a one-size-fits-all trick to creating a savings plan that works. However, there are a few methods that have proven to be exceptionally effective when it comes to creating a budget and trying to stick to it. One such method is Dave Ramsey’s envelope system.

This saving plan is nothing new as it has been there for decades. But people are still confused about how it works. That’s what we are going to discuss in our article today. Stay with us as we clear up some myths around the envelope budgeting system. After reading this article, we bet you would want to give this money-saving method a try. 

 What does the Envelope budgeting System mean?

The first and foremost step to budgeting is to figure out how much do you spend over each of the budget categories. Once you have figured that out, you need to implement the Envelope System. For that, you need to divide your monthly expenses into different budget categories. After that, you need to assign a fixed amount of money to each of the categories. Then you need to name the envelopes to tuck the cash away to meet your expenses within your budgetary limits. This is what envelope budgeting system is all about. Through it, you can even teach your kids about money-saving.

“This method not only allows you to track your expenses but enables you to see how much you can save over 30 days“says Alex Reynolds of EMUCoupon.com. “You can cut back the amount that’s left in the envelope at the end of the month while planning your budget for the next month.” 

In its essence, the envelop system keeps you from overspending. Try switching to this budgeting approach if you keep going overboard in a particular category. It will help you develop more self-control and accountability. 

How Does It Work?

Lack of accountability is one of those reasons why we end up overspending. We have no one to tell us to stop. That’s where the envelope system helps. Sometimes, it is the only tool you need to bring your financial health back on track. So, let’s figure out how this system works.

1.   Divide your expenses into budget categories: 

The envelope system helps you to get a better hold of your expenses and prevents you from overspending. If your expenses are out of your control, dividing them into different categories can help. This way you can figure out where most of your money is going. You can implement an envelope system on your entire monthly budget or only to those categories that tend to bust your budget. You can put aside a fixed amount of money for gas, entertainment, restaurants, grocery, and clothing. The envelope system will serve as your accountability partner. By simply peeking through the envelope, you can figure out whether or not you have reached your budgetary limit for the month. 

2.   Figure out what you spend every month: 

You need to save at least 10 percent of what you have earned every month. There are times when things like birthdays or baby showers come up unexpectedly. When that happens, we tend to overspend on gifts. If that’s what disrupts your monthly saving goal, then its important for you to limit it to a fixed amount for the month. You can create a separate category for gifts and assign a specific amount to it so that you don’t end up taking out money from another envelope, or worse, your savings. Be realistic while deciding your budget categories. Think of even the smallest expense that adds to your budget. 

While you are at it, make sure that you and your partner are on the same page when it comes to budget amounts. This way you will able to prepare yourself for any unexpected expense that comes your way. 

3.   Filling envelopes with cash: 

Once you have figured out what you spend every month, its time to fill the envelope for every category with the decided amount of cash. Let’s say you have decided $250 a month to spend on groceries. After receiving your first paycheck, withdraw $150 from your bank account and put it in the cash envelope and label it as groceries. Do the same when you get your second paycheck and put another hundred dollars in the envelope. That’s your grocery budget for the month. It’s quite simple, right? 

Create a list of all those things you need to purchase on your grocery run. Take the exact amount of cash you have put aside for grocery with you. This will help you to stick to the budget you have decided and kept you from overspending. 

It might be hard but it’s so much better than busting your entire budget over a few budget categories. Don’t forget to put the change back in the envelope. This will motivate you to stick to your savings goal in the long run. 

4.   Spend only what you have decided:

Always remember, you will never get the money that’s gone. Once you have spent your budgeted amount on groceries, make use of the leftovers you find in your fridge. Raid your pantry to find any item you can cook for dinner without having to make a grocery store run. The chances are you would find a couple of items that you can cook over the week without exceeding your food budget. When you get intentional about your spending, it gets easier for you to save some cash every month. 

Advantages of an envelope system:

·         It adds more discipline to your life:

To improve as a person, we all need discipline in our lives. Finding balance puts one on the right track. The envelope system helps you develop good spending habits. It disciplines you as a person. You learn to take responsibility for every aspect of your life and put your best effort into improving yourself. 

·         Use in case of an emergency:

The money saved using the envelope budgeting system approach comes handy in case of an emergency. It saves you the hassle of asking for a loan when you are in desperate need of funds. 

·         Your Budget Becomes Tangible. 

Using cash instead of a card makes your money more tangible. The problem with credit or debit cards is that they often cause you to splurge. However, with cash envelopes that is not a problem. This approach to money-saving keeps you in tune with your budget. That’s because you can keep an eye on what you are spending every time you reach for an envelope to take out some cash. 

·         There are no Overdraft Charges:

Let’s admit, we all hate it when the bank charges us an overdraft fee. Using cash instead of a debit card solves this problem for you. You don’t need to pay the absurd fee that the banks charge you in case you over-draft. 

·         Prevents Wasteful Spending:

Using the envelope system approach, you think through every time you decide to make a purchase. It keeps you from spending wastefully. That’s because you can see the cash disappearing before your eyes. Research shows that people tend to spend 10-15 percent less than do while using plastic cards. 

·         Never Miss a Payment again: 

The envelope system keeps you on track with your payments. You know where is your money is going and what needs to be paid. On the other hand, with an electronic program, you sometimes miss entering a purchase and lose track of your payments altogether. With an envelope budgeting system that’s never a problem. 

Wrapping up: 

Saving money can be hard for some. However, there are various ways you can keep a close eye on where your money is going. One of the best ways to make that happen is to use an envelope budgeting system. This approach ensures that you are not overspending while keeping up with your monthly necessities.

Also Read: 10 Frugal Living Tips