How to Use Envelope System to Budget Your Money

budget-your-money

For many of us, budgeting might not be the most exciting thing we can do with our money. Some of us consider it a waste of time to monitor every dollar we spend. It’s going to be spent anyway, so why bother knowing where it goes? Other think it’s too tedious to be dealt with on a regular basis. In fact, when we think of budgeting, we think it’s all about spreadsheet and inputting every minute detail of a purchase.

Well, the good news is that, that is just one way of budgeting. Like most things in personal finance, there is no one-size-fits-all method of managing your money. For the really meticulous ones, having an spreadsheet which they update regularly or even on a daily basis works. We can’t blame them for that; that’s their own style and maybe it’s what gives them peace of mind.

The techie ones, or shall we say, the Millennials, prefer more modern methods such as using budgeting applications installed on their phones. For them, it’s much easier to access, they can update their expenses on the go, and it usually comes with graphic presentations of their expenses. We can’t blame them either; Millennials have a soft spot for modern ways of doing things. Some would even pay for premium applications or subscriptions just to be able to use an app they like.

But do you know that there is a rather more “relaxed” method of successful budgeting? It’s kind of low-tech but it works that’s why it has been around for decades already. Many individuals and couples still use it today because of its simplicity. They call it the envelope system.

How does it work?

The envelope system is very simple to use. You only need envelopes, a pen, and lots of discipline to make it work. Here’s how.

Let’s say that you already know that you spend $400 on groceries every month. And let’s say your employer releases paychecks twice a month. On your first paycheck, put in $200 in an envelope and label it “Groceries.” On your next paycheck, put in another $200 to complete your budget. If you pay around $500 for utilities, take another envelope, fill it with $500 every month, and label the envelope “Utilities.” Do the same for each expense category you have. For your savings, you might want to just put your savings right away in the bank rather than put it in an envelope. In this case, the risk of losing your cash outweighs the benefit of saving.

Now, here’s the thing. You can’t take out money from an envelope except for the label which it was intended. The “Groceries” envelope must only be used for groceries only, and so on. Never borrow from another envelope. By having this discipline, you will be forced to cut back on unnecessary luxuries and save more often.

If you do underspend on your budget, then congratulations – you’ve done a great job. You are free to use the extra money left to reward yourself within reasonable boundaries.

You see, it’s that simple. Low-tech as it may seem but it works for many. Go ahead and try it at home and let us know if it has worked for you as well.