How to Use Envelope Budgeting

Updated on July 3, 2019
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Rebecca Graf is a trained accountant who worked in the field for more than 20 years.

Budgeting is important in everyone's life. All businesses do it. They need to in order to be successful. It is a guideline for financial success.That also means it is a great idea for individuals.

There are many ways to budget. Not all methods work for everyone. One that can work for many is called the envelope method. It is simple and helps everyone involved to know exactly where they stand.

Understanding the Concept

Here's how the envelope budget works in a nutshell. Get a number of envelopes. Label each one with your budget category. Write the dollar amount of that category's budget for each month or paycheck. With each paycheck, put in the designated amount. When you have to spend from that category, pull from that envelope only. Not enough money? Don't spend it.

Start With a Budget

Create a budget. All budgets are unique to each individual. Get a pad of paper and a pen. List out all your incomes and expenses. Here is an example of how it works.

Let's say you make $2000 a month. That is the total dollars you bring home every month whether it is bi-weekly or weekly. That's your income.

Now, look at your expenses. List out all those you have to pay in order to survive. That would be your rent/mortgage, utilities, car payment, gas, food, internet, and insurance for a few of the most common. What do you have left over after those expenses? If nothing or not enough, you need to find either more ways to bring in income or to cut expenses. That is a topic for a different article.

If there is money left, note how much you can spend on entertainment, clothing, or to put aside for a trip or a new laptop. The ideal budget equals zero with anything "extra" used as savings.

Be Realistic

This is a big problem with a lot of people. They are completely unrealistic in their budgeting. Do not put your entertainment expense at zero or ten dollars a month. Can you really go without spending money on a movie or going to the bar with friends for the entire month? Most of us need a little entertainment now and then to save our sanity. Make sure you are realistic on how much you need to spend in each category.

Also, keep in mind that some expenses don't occur every month. If you can avoid going to the movies or buying clothes every month, still put something aside with each paycheck. It might only be a dollar, but those dollars add up. Then when you need a new pair of shoes, you have some money set aside for it.

Implementing the System

You have your budget laid out. Now you take the envelopes and write a category on each one as well as the dollar amount you need in it to pay that bill. Also, note when the bill is due so you don't forget and get charged a late fee. Get a shoe box or something similar to store them in and then put in a safe place. When you get paid, take that paycheck and divide it up among the envelopes where they need to do.

When it comes time to pay a bill, take the money out. If the bill is less than you expected, put the extra money back in the envelope for future use. You might budget $80 a month in gas you will need to get to and from work each month. Due to changes in gas prices, you might actually only spend $75. Put that $5 back in the envelope as next month the prices might increase. Remember to be safe rather than sorry.

Rewards

This is a very rewarding experience if it works for you. You'll become more disciplined in how you spend your money. Money will stretch further as you can physically see where it should be. Putting a budget down and trying to follow it virtually can be disasterous for many people. Physically managing your money can be very beneficial.

Give it a try and see how it works for you. Not every plan works for every person. You have to give it a shot and see if it is the right fit.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

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    • Carb Diva profile image

      Linda Lum 

      4 months ago from Washington State, USA

      This isn't new--it's the Dave Ramsey method. Most people pay bills online, so other than groceries, gas, and entertainment, how does this work?

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