This is a great budget system for anyone with a tight budget or anyone trying to cut back on spending that needs help being more disciplined. When I was in college I had a very tight budget, in fact, I’m surprised I managed to buy food at all. I love this system, I used it throughout college. I worked at least two jobs throughout the summer to earn enough money to provide for myself, because some semesters I could find a small part time job and others I couldn’t find anything. This system helped me stretch my summer earnings throughout the entire year.
Here are the details for the envelope budgeting system:
First, figure out your pay period (monthly, weekly etc). For your pay period list your expenses. If you don’t know the exact amount of your expenses I would suggest tracking EVERYTHING you spend money on for at least TWO pay periods. Three is better if you have the time. Average out how much you spent in each area and evaluate if your spending is realistic. Realistic budgeting means that you are spending money on things that are most important first, followed by the ability to pay down your debt and save and above all that your spending stays within your limits (income).
Once you know your pay period, your budget categories and how much you are realistically spending in each area, you are ready to start.
Here is an example of what you should know at this point:
Pay period- monthly
- Rent- $800
- Car insurance- $100
- Entertainment/eating out-$50
Using this example, let’s walk through the rest of the steps: First, think through which bills are consistant, that is, the amount never changes. In this examle that would probably be rent, phone/internet/cable, and insurance. I would lump utilities into this category as well, even though it may vary from month to month. Figure out what a high monthly utilitiy cost is and use that for your budget amount (on the months it is less you’ll have extra money to save). These are bills that you can set up automatically; so, you won’t use an envelope for them.
The remaining expenses are typically where people overspend and get into trouble. This is when the envelope system can be a great tool! For this example you would need four white envelopes, one for each remaning category: gas/transportation, groceries, entertainment/eat out and misc. Label each envelope with the category and the amount needed. Each time you get paid, monthly in this example, you fill the envelope with the correct amount of cash. So “gas” would have $200, “groceries” $150 and so on. Here is the trick, you can now physically see how much you are spending and how much you have left. When the money is gone YOU ARE DONE SPENDING.
This will help develop discipline. You now always know how much money you have left. Instead of charging your card and finding a surprise at the end of the month that you overspent by $200, now your cash will run out and your spending is over until the next payday. This system also requires that you budget out how much you would need for an upcoming pay period. If you did have a set amount for an entire month for groceries or gas you would have to pay attention, or the last week of the month you may find yourself walking to work and eating mac and cheese for every meal. If you are worried about this happening, figure out how much you need for just one week instead of an entire month and refill your envelopes once per week.
As you continue to use the system you will gain greater control over your spending and have money left over that should be put toward emergency savings, paying off debt or investments.