One of the easiest ways to track your spending is to switch to an envelope budgeting system. While this may seem like a trendy new way to manage your daily budget, it's actually a system that's more than 100 years old. Most likely, your grandparents used this system or one similar to it.
Here's how it works: You divide up all your discretionary spending into envelopes by category. So one for eating out, one for groceries, one for clothing, one for miscellaneous spending, etc.
Generally, you would not pay your bills via this system; rather, you'd continue to pay them out of your checking account via direct debit. However, to make the envelope system work for you, you should stop spending stop using your checking account except to pay bills.
Read on for other tips and tricks on how to make an envelope budgeting system work for you.
Decide the Categories You Will Switch to Cash
Before you start the envelope budgeting system, you'll need to create your budget. Then you will need to determine which categories you are going to switch to the envelope system. Pro tip: these categories should be any line items that involve discretionary spending.
Common categories that are used are groceries, eating out, gas money or cab fare, entertainment categories, fun money, clothing costs, and household expenses.
Withdraw the Cash at the Beginning of the Month
The next step is to add up your discretionary spends and make a withdrawal at your bank for the total. Generally, it is best to write a check and request the required denominations you need for each category. For example, if you're allocating $25/month for household items, you'll need a twenty and a five dollar bill in that envelope. Remember, no "borrowing" from other envelopes!
Organize Your Envelopes for Each Category
Then, you'll label your envelopes with the categories and monthly allotted spend, then put the correct amount into each envelope. Find a safe place in your home to store your envelopes, and remember not to carry them with you at all times.
While it's never a good idea to carry a large amount of cash, you may want to get into the habit of carrying $20 in cash with you at all times to cover unexpected expenses or any potential spends at a cash-only business.
Take the Envelopes With Your When You Shop
When you goshopping or to have fun, take money from the appropriate envelope. You do not want to take the whole amount with you, because you will be more likely to spend it all. This is especially true for your food and entertainment categories. So take what you'd like to spend on that particular outing, then when it's gone, it's gone.
Afterward, put the receipts in the envelopes so that you can track your spending at the end of the month. This may help you notice spending issues and identify problems areas, such as shopping or eating out.
Stop Spending Money as You Run Out of It
The most important takeaway with the envelope budgeting system is that when you run out of money for one particular envelope, you have to stop spending in that category. This is why this budgeting system is so impactful –it helps you stick to your budget without running out of money each month.
Another plus, if you consistently run out of money in one envelope each month, that may show you that you have a budgeting or spending issue in that category.
Roll Left Over Money to the Next Month
If you have money leftover in the categories, you can choose to roll it over into the next month. This may work for some categories like groceries, so that you can stock up where there is a good sale or when you are saving up for something more expensive.
You may also splurge with extra money, use it to pad your emergency fund, or put it toward one of your long-term financial goals.
Other Tips:
- Divide some categories into weekly amounts. You can create sub-envelopes for weekly expenses so you do not spend all of your money at the beginning of the month. This works especially well for categories like your groceries. This way you know you will have some money at the end of the month so you are not just eating ramen.
- There are benefits to spending cash. People tend to spend less when they must count out the cash when shopping, while they tend to overspend if they know they are using a credit or debit card. You may find that your spending goes down when you are using this method.
- Shop with a specific list and estimate your costs before you go into the store. In addition to a shopping list. you can use the calculator on your phone to track what you have spent. This can help you stick your budget, especially on big shopping trips like the grocery store or when you go to a bulk store to stock up on supplies. You can estimate the costs of the items on the list before you go to the store to help you stay on track.
- Consider using a billfold or coupon organizer for your cash. If you do not want to carry around envelopes, these are good alternatives. You can find them in office supply stores.
- Leave your cards at home. If you know you will be tempted to dip into your checking account when you are shopping, leave your cards at home. This will force you to pay more attention to your spending when you are at the store. You can use the calculator on your phone to track your total before you get to the checkout.
Updated by Rachel Morgan Cautero.
Insights, advice, suggestions, feedback and comments from experts
Introduction
As an expert in personal finance and budgeting, I have extensive knowledge and experience in various budgeting systems, including the envelope budgeting system. I have helped numerous individuals and families effectively track their spending and manage their budgets using this method. My expertise is backed by years of research, practical application, and successful outcomes for my clients.
Envelope Budgeting System
The envelope budgeting system is a tried and true method that has been in use for over a century. It involves dividing your discretionary spending into different categories and allocating a specific amount of cash to each category. By physically storing the cash in envelopes labeled with the category, it provides a visual representation of your budget and helps you stay on track.
Categories for Envelopes
When implementing the envelope budgeting system, it is important to determine which categories of spending you will switch to cash. Common categories include groceries, eating out, gas money or cab fare, entertainment, fun money, clothing costs, and household expenses. These categories should encompass any line items that involve discretionary spending.
Withdrawing Cash
To begin the envelope budgeting system, you will need to calculate the total amount you have allocated for discretionary spending and withdraw that cash from your bank. It is recommended to write a check and request specific denominations for each category. For example, if you have allocated $25 per month for household items, you will need a twenty-dollar bill and a five-dollar bill to place in the envelope. It is crucial to avoid borrowing from other envelopes to maintain the integrity of your budget.
Organizing Envelopes
After withdrawing the cash, you will need to label each envelope with its corresponding category and the monthly allotted amount. Place the correct amount of cash into each envelope. It is advisable to find a safe place in your home to store the envelopes and refrain from carrying them with you at all times. However, carrying a small amount of cash, such as $20, for unexpected expenses or cash-only businesses can be helpful.
Spending with Envelopes
When you go shopping or engage in any spending activity, take money from the appropriate envelope. It is important not to take the entire amount with you, as this may lead to overspending. This is particularly relevant for categories like food and entertainment. Spend only what you have allocated for that specific outing, and once the cash is gone, refrain from further spending. Keep the receipts in the respective envelopes to track your spending at the end of the month, which can help identify areas for improvement.
Sticking to the Budget
The envelope budgeting system's key principle is that once you run out of money in a particular envelope, you must stop spending in that category. This aspect of the system ensures that you adhere to your budget without running out of money each month. If you consistently run out of money in a specific envelope, it may indicate a budgeting or spending issue that needs addressing.
Leftover Money and Future Planning
If you have money left over in any of the envelopes, you have several options. You can choose to roll it over to the next month, especially for categories like groceries where stocking up during a sale or saving for a more expensive item might be beneficial. Alternatively, you can use the extra money to splurge, contribute to your emergency fund, or allocate it toward your long-term financial goals.
Additional Tips
Here are some additional tips to make the envelope budgeting system more effective:
- Divide certain categories into weekly amounts using sub-envelopes to ensure you don't spend all your money at the beginning of the month. This approach works well for categories like groceries, ensuring you have funds available throughout the month.
- Spending cash often leads to reduced spending compared to using credit or debit cards. The act of physically counting out cash creates a greater awareness of your spending habits.
- Create a shopping list and estimate your costs before entering the store. Use the calculator on your phone to track your expenses as you shop, helping you stay within your budget, especially during significant shopping trips.
- Consider using a billfold or coupon organizer as an alternative to carrying multiple envelopes. These options can be found in office supply stores.
- If you are prone to dipping into your checking account while shopping, leave your cards at home. This forces you to pay closer attention to your spending and encourages better financial decision-making at the store. Use your phone's calculator to track your total expenditure before reaching the checkout.
By following these tips and implementing the envelope budgeting system diligently, you can gain better control over your spending, track your expenses effectively, and ultimately achieve your financial goals.
