Maintaining a working budget is key to your financial well-being. One way to stick to your predetermined spending goals is to use the “envelope method.” This simple but effective way to monitor spending is a great way to make your budget work for you.
This blog post is the first in a series of three budgeting articles designed to help you create a system for managing your money that works for you.
How to use the Envelope Method
People who use this method have a clearer picture of where their money goes. It also helps them from overspending, by showing them just how much discretionary money they have weekly. Some people tend to overspend if they’re in the habit of just reaching for their debit and credit cards for quick purchases. Also, this is a great way to make sure you never miss an important payment. With the envelope method, you’ll account for all your expenses, so there should be no overdraft fees from your bank, and no late fees on your other bills.
Before credit cards, debit cards, and multiple bank accounts people used envelopes to keep their money organized and to ensure that they had enough to pay their bills each month. To use this system, you’ll start by giving every dollar you earn a job on paper.
First subtract recurring monthly expenses like rent, utilities, insurance, gasoline, and car payments from your income. Then, estimate your non-recurring expenses. Setting aside money for dental work, Christmas shopping, travel, car repairs and maintenance, home repairs, and back to school shopping is a smart way to break up large bills into more manageable chunks.
Here’s an example of how that might look:
Take-home monthly income:
- $2000 each month ($500 each week)
- Rent $600 per month
Subtract ¼ of rent from income each week
- Electric $60 per month
Subtract ¼ of electric from income each week
$350-$15 = $335
- Personal loan payment $80 per month
Subtract ¼ of loan payment money from income each week
$335-$20 = $315
- Cell phone $50 per month
Subtract ¼ of cell phone money from income each week
$315-$12.50 = $302.50
- Gasoline $60 per month
Subtract ¼ of gasoline money from income each week
$302.50-$15 = $287.50
- Groceries $200 per month
Subtract ¼ of grocery money from income each week
$287.50-$50 = $237.50
- Christmas fund goal: $500
$500 divided by eight weeks (eight paychecks) = $62.50 per week
$237.50-$62.50 = $175
General savings account or emergency fund (try to set aside 10% of take-home pay) = $50 per week
$175-$50 = $125
- Car repairs fund goal: $250
$250 divided by ten weeks (ten paychecks) = $25 per week
$125-$25 = $100
- Quarterly car insurance payment: $84 every three months
$84 divided by 12 weeks = $7 per week
$100-$7 = $93
- Spring road trip: $600
$600 divided by 24 weeks (six months) = $25 per week
$93-$25 = $68
This final amount of $68 per week is your spending or discretionary money. Use it for entertainment, gifts, household items, or unexpected expenses. Of course, you can save it or pay extra on bills as well, but once it’s gone that’s all you can spend for the week.
Create envelopes and put in the cash
If you don’t pay some bills with cash like rent, utilities, and cell phone, be sure you are still allocating this money to their respective categories each week. Cash the remainder of your check asking for small bills at the bank to make dividing it up easier.
Label each envelope with the name of the category and count out the cash that belongs in each one.
Stuff the envelopes.
When you only spend the cash in the envelope and stop spending when its empty, you can’t go over your predetermined budget. If you have left over money in the envelopes at the beginning of the next month, you can add it to your discretionary money.
You are in charge of your budget and your financial goals, so if you need to expand a certain category, simply adjust it in your budget for the next month. For example, if your utility bills fluctuate based on the season, be sure to take it into account when doing your budget.
- A small accordion file may be easier to handle than individual envelopes if you have a lot of categories.
- If you share finances with someone, be sure to get their agreement before you try any new budgeting method.
- Remember that there’s a learning curve with a new budget, so be patient as you learn how to make this work best for your situation.
We'll have more tips soon as we continue our series on budgeting! Want to know when they come out? Subscribe to our blog using the "Subscribe to Email Updates" form in the right column!