An envelope system is a personal finance management tool that helps you keep track of your income and expenses. It’s basically a budgeting technique where you give each expense category a fixed monthly amount of money, called an “envelope,” from which to spend. Interestingly, I found out that my parents used this system early on in their marriage to manage their money. So, I figured I’d share what the envelope budget is and how you can use it to save money.
Setting Up Your Budgeting System
To set up your first envelope budget, you’ll want to think of a few categories of where you’re pretty sure you could spend less each month. Where do you feel like your spending is most out of control? For example, some people may know that they spend too much going out on the weekends. Others may feel like they could cut their monthly grocery bill if they just tried a little harder. If both of these are tru for you, then you’d start with one envelope for “groceries” and another for “entertainment”.
You probably don’t need any envelope for fixed expenses that don’t change each month, like rent, car payments, or subscriptions like Netflix or Amazon Prime. You’d either stop the subscriptions to save money, or keep them because it’s worth it to you.
Some starter envelope budget categories:
-Groceries
-Clothing
-Entertainment.
-Eating out
-Alcohol
Using Your Envelopes
Now that you have 3 or 4 budget envelopes, you’ll need to set aside exactly how much you plan to spend on these categories for the next month. The best way to figure this out is to look at how much you’ve spend in each category over the previous months. Take the average of those amounts to know how much you typically spend. This might be more than you’d like.
Once you know how much you typically spend, you’re in control. You get to decide much you will spend on each of these categories. Pick an amount less than the average and write it on an actual envelope. Before the 1st of the next month, go to the ATM or your local bank and withdraw the amount of cash that you chose for each of your envelopes.
For that month, whenever you buy something that would fit in that envelope budget category, make sure to use cash from that envelope. For example, every time that you eat at a restaurant, drive-thru, or order pick-up or delivery, you’ll pay with cash from the “Eating out” envelope.
Don’t worry, most people will run out of money in their envelopes before the end of the month. If you really want to take control of your money and future, have the discipline to stop eating out, or buying any more clothes once you run out of money from that envelope.
Saving for the Long-term
Expect the budget envelope system to be challenging for the first month or so. You’re basically forcing yourself to make conscious decisions about where you spend your money. And this is truly the first step to saving for the long-term. Control your spending with envelopes today, and you’ll be saving and investing tomorrow. If my parents could do it, surely you can too! Good luck!