What’s The Deal About Envelope Budgeting?

By Sanesh Mathew | August 23, 2017

What’s The Deal About Envelope Budgeting?

Here’s a scenario that may sound familiar. You have a budget in place and you are constantly trying to follow by making use of tools like Excel or various budgeting apps. You’ve managed to work out your expenses and savings, but unfortunately, you end up with the same result at the end of every month – you’ve overspent. Talk about an epic fail!

You can blame your Credit Card or your Debit Card all you want, but what you don’t realise is that swiping them without a care in the world is actually hurting your finances since you have no idea how much you’re spending and how much you have left in your account. It’s no wonder you aren’t able to stick to your budget.

Additional Reading: How Budgeting Can Transform Your Financial Life

Okay, chill! Lucky for you, we’ve found a budgeting system that should work wonders. It’s called envelope budgeting and trust us when we say that you won’t ever overspend again after you get on board with this system.

The best part about envelope budgeting is that you won’t have to be dependent on your cards any longer. Instead, you stick to hard cash to control your expenditure. Once you’ve run out of cash, you stop spending. Sounds like a pretty sound plan, right?

Here’s how to build an envelope budgeting system:

How much discretionary income do you have?

The first step before you envelope budget is to determine your discretionary income. Discretionary income is the amount of money you have left after you pay all your bills (rent, utilities, Credit Card, etc.) and keep your savings and investments aside.

Time to budget

Once you’ve determined your discretionary income, it’s time to budget. Divide the amount among your different expenditure categories. Common categories include groceries, entertainment, household goods, food, clothing, and gifts. You can easily determine how much money you have been spending on each of these categories by checking your previous account statements. Build your budget based on your findings.

Additional Reading: The Mantra For Successful Budgeting

Envelope time

Now that you have assigned a particular amount of money to each of the categories, it’s time to assign an envelope to each of these categories as well. Fill up the envelopes with the budgeted amount.

Expenditure Time

For each category, you are allowed to spend only the assigned amount of cash for the month. If you run out of money in any of the envelopes, it means that you have met the budget for the month for that category. You can’t spend any more in that category until you get your next paycheck.

What about debts?

Do you have debts to clear? Use leftover money from the envelopes to pay it off. If you don’t have any debts, then you can put the remaining cash into your savings account.

Additional Reading: How To Balance Your Income And Expenditure

Why use the envelope budgeting system?

Because it works! If you have a dedicated amount of cash for all your expenditures and you run out of cash, there are fewer chances that you’ll overspend. In addition, your budget becomes more tangible. With plastic, you can easily overspend because there is a higher limit attached to it. But with envelope cash, you’ll stick to your budget because each time you open an envelope to pull out cash, you’re going to be reminded of your budget.

Also, with envelope budgeting, you are less likely to spend unnecessarily. Before you make a purchase, you will think twice about whether or not it is necessary since there is a cash limit. Lastly, this budgeting system will instil a sense of discipline in your life.

Additional Reading: Start Budgeting Early

Some disadvantages

One of the biggest disadvantages of this budgeting system is that a lot of people probably wouldn’t want to depend on hard cash for their expenses. After all, plastic is much simpler and easier to use. Also, since envelope budgeting requires hard cash, you’ll need to keep running to the bank or an ATM to withdraw cash. Most people aren’t willing to do that very often, so they just use their Debit or Credit Card to pay for stuff.

Lastly, you are not going to get any reward points or cash back for your purchases (like the ones you get when you use your Credit Card). With envelope budgeting, you aren’t going to be using your Credit Card much so you can forget about these perks.

A few more tips on envelope budgeting

The paycheck budget – There are different ways to set your budget. You can build a weekly budget, a monthly budget or a paycheck budget. However, a paycheck budget is the system that we would recommend.

Make adjustments wherever necessary – You aren’t going to get it right at your first attempt. It may take a few rounds of trial and error to get your categories and budget amounts right. So, don’t refrain from making adjustments.

Cut down on your bills – Think you are spending too much on your internet connection or your house rent? Shift to a cheaper plan or a cheaper accommodation. Cutting down on your bills means you increase your discretionary income. This means more cash in the envelopes.

Stick to your plan – Like we mentioned earlier, you aren’t going to get everything right at the first time of asking. Besides, it takes time to get used to budgets and to get the right budgeting amount for each of your categories. But, trust us, the envelope budgeting system won’t fail you.

Additional Reading: Charting Your Path To Financial Freedom

Have you tried the envelope budgeting system yet? Let us know if it worked for you in the comments section below. Also, if you have other such budgeting ideas, please feel free to comment.

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Category: Budget & Savings Financial Planning

About Sanesh Mathew

A talkative sleepyhead, Sanesh, enjoys watching horror movies, listening to music, reading all things related to personal finance and wandering aimlessly (walking meditation, he calls it!). He refers to himself as a 'simple human being with a rather chaotic mind'.

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