How to Do Envelope Budgeting

After you budget your money, your next challenge is to follow through. It can be difficult keeping track of how much money you have left for everything. The envelope method is one way some people use to make sure their spending stays within their budget.

Steps

1. 
   Create your budget. This means dividing your money into categories. Some suggestions include:
   • Rent or mortgage payment
   • Childcare
   • Automobile costs
   • Groceries
   • Club Fees (or some type of organization)
   • Utilities
   • Taxes
   • Saving
2. 
   Assign each category to a single envelope. Use whatever size works best for you. The money that will be spent outside your home should be kept in envelopes that fit easily in your wallet or purse. Use a marker and make it easy to read.
3. 
   Break down your income onto the various envelopes. All of the categories that get spent incrementally (not all at once) should be spent in cash. Rent, mortgage payments, or anything you're only going to pay once and in full can have their envelopes left empty, or you can write a check and put it in there, or you can get rid of those envelopes altogether. The remaining envelopes, however, need to have the allocated cash inside. If you budgeted $500 to spend on groceries until your next paycheck, for example, put $500 cash in that envelope.
   
   
   • Optional: In pencil, write on the back of the envelope how much you are putting in.
4. 
   Pull money from the envelopes as needed for that category. Recalculate how much is left, and write it on the back, so you know how much remains at a glance. If you run out of money for a category but need more, you only have two choices:
   
   
   • Just do not spend any more money in that category. Do you really need to spend it? Can it wait until the money is replenished in that envelope by your next paycheck?
   • Pull money from another envelope. Of course, that leaves you less money to spend in that category.

Example

You get paid twice a month. This paycheck is for $1300. These are the bills that will be due before your next paycheck:

• Rent - $600
• Utilities, water, sewage - $150
• Electric - $80
• Student loan payment - $100
• Total: $930

Assuming you know for sure that your next paycheck will cover your bills and then some until the paycheck after that, you might divvy up remaining money ($370) as follows:

• Savings - $70, transfer to savings account
• Groceries (food, toiletries, etc.) - $100, cash in envelope
• Gas - $60, cash in envelope
• Entertainment - $70, cash in envelope
• Dining out - $70, cash in envelope

Video

Tips

• If you have been using an envelope for car payment and you complete paying for the car, continue to make at least half of that payment each month towards a new car or towards general savings. Because you are already used to making this payment, it's money that you won't miss, and when it's time to buy a new car, it won't hurt so much having to start making payments. For the long times that pass between new cars, this money would do well in a bank CD or mutual fund that's not too risky.
• Some people keep receipts for any money they spend, and put those receipts in the envelope. This can help with seeing how you spend your money (and where you can cut corners). It can also be useful during tax time.
• Envelope budgeting works particularly well for keeping track of cash spending. Paying cash, particularly when you have a clear, visual indicator of how much cash is allocated, will probably result in your spending less, overall.
• Try using bills in larger denominations. Even if it is the same amount of money, you may be less tempted to spend it (especially little bits of it) if you must break up a larger denomination to do it.
• Pay yourself first. The purpose of a budgeting system is to make sure you don't spend more money that you have, but it's also a great way to save money. The best way is to reserve that money before you create the rest of your budget. That is, deposit your paycheck and take out only what you allocate for spending during that month or pay period. Leave the rest in the bank.
• You may find it useful to have a "bank" or "debit card" envelope, so that if you want to buy concert tickets online, for example, you can use your card and replace the money from the relevant budget envelope into the bank envelope. This money stays in the envelope until the end of the month or budgeting period and can then be deposited back into your account. This is a great way to avoid overspending, and you'll feel great putting money back into your account!
• Never, ever, pull additional cash from your bank account, or use a debit or credit card, if you want to stay within your budget. No budgeting system works unless you stick to the parameters that you have set. Sometimes you might overspend, but the resulting discomfort will motivate you to keep better track of your money next time.
• If you're low on cash for a category, and think you might need more, pull some money from another envelope before you leave. The last thing you want to do is pull out your debit or credit card.
• Consider using recycled envelopes. You probably get dozens in the mail each month. If you open them with a neat cut, you'll have a fresh set of envelopes delivered to your door each month.
• Consider tracking your envelopes balance digitally, using an app such as Envelopes 2 on the iPhone or Evelopes (budget system) on android

Things You'll Need

• Envelopes, whatever size works for you
• Marker
• Cash

Related wikiHows

• How to Teach Your Child About Budgeting
• How to Budget Your Money
• How to Create a Household Budget
• How to Create a Working Budget
• How to Create a Budget
• How to Start Saving to Become Independent

Sources and Citations

• About.Com - Research source.

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