Why Envelope Budgeting System is the Key to Financial Stability?

Making a personal budget is necessary to manage money. The envelope budgeting system is one such technique that helps track each month’s spending.

The process involves dividing the cash into individual envelopes that represent the spending to which each envelope is subjected.

Key Points To Remember

• The envelope budgeting system is developed for people who tend to spend cash primarily.

• The main intention of this system is to limit the spending of each month by limiting the spending to only the amount that is available in each envelope.

• It can be used along with other budgeting methods like zero-based budgeting.

• The envelope budgeting starts with an estimation of the monthly incomes and expenses.

Why Envelope Budgeting System Is The Key To Financial Stability? 

A personal budget helps in maintaining the records of income and expenses. According to a report in 2021, approximately 85.6% of Americans claim that they retain a budget each month, while 90.24% say that everyone should maintain a budget regularly.

There are many ways to maintain a budget, the most common ones being Zero-based Budgeting and Annual Budgeting.

An envelope budgeting system is a cash-based approach that helps people that find it challenging to stick to their budget be more aware and mindful and become more calculated with the ways they spend money.

It’s a simple process and does not require a lot of processes and procedures. You begin with a number of envelopes, each of which will represent an individual budget category. Then, you are to assign a certain amount of cash to each envelope based on how much you expect to spend on it for one month.

Once an envelope is empty of cash, you will no longer be spending in that category until a new budget period begins. Envelope budget can also be used through mobile budgeting apps that allow you to make digital envelopes to keep track of your debit card spending.

How Does The Envelope Budgeting System Work? 

Setting up an envelope budget is not a tough job. However, there are a few specific steps that you must follow while setting it up.

Add Your Monthly Income

Prior to setting up your budget by using the envelope method, it is essential that you add up your monthly income. This will include all the money that you are expecting to bring in for the month.

The sources of your income may include:

• Paychecks from your regular job.
• Investment incomes.
• Earnings from your part-time job.
• Government benefits (if applicable)
• Side hustle incomes.
• Child support payments or alimony (if applicable)
• Stimulus or advance tax credit payments

Any one-time sources of income like tax refunds or rebates may also be included in your envelope budget.

Set Up Budgeting Categories

The next step includes deciding which categories to incorporate into your budget. The categories which you may include are:

• Groceries
• Clothing
• Gas and oil
• Entertainment
• Personal care
• Pet care
• Dining out
• Gifts
• Household items

The money that you spend on house rent, insurance, debt payment, etc., is not to be included in the envelope budget as they are the fixed part of your personal budget and don’t tend to undergo much change from month to month.

These bills might be paid either digitally or by a credit or debit card or even a check. The cash envelopes will represent only those expenses that are not stable each month.

Assigning Budget Amount To Each Envelope

Once your income is determined and you have chosen your budget categories, you will have to decide how much money you need to allocate to each of the envelopes. For example, if you have a total of $1,500, this is how your envelope budgeting is supposed to look:

• Groceries: $412
• Clothing: $120
• Gas and oil: $131
• Entertainment: $243
• Personal care: $54
• Dining out: $198
• Miscellaneous: $76

This way, your total spending would add up to $1,234, and you will still have $266 left with you. This amount can be allocated to cash envelopes like pet care, charity, child expenses if you have any, etc.

Spend The Cash In Each Envelope

Once you are done settling the cash in each envelope, make your budget work by spending it to cover your expenses. Every time you take cash out of an envelope, make sure you note down the amount left after you’ve made a payment.

Let’s say you had $100 in your envelope for gas money, and you spent $30 at the gas station. Make sure you write the balance amount, which is $70 in this case, at the back of the envelope, which will help you to keep a tab of the money that you are left with.

The key to successfully making an envelope budgeting system work is to make sure that you stick to the amount that you have allotted for yourself. If you have $500 for groceries, it gives you $125 to spend every week on groceries. If you run out of that budget, you will not be able to spend any more on groceries till a new budget month begins.

It would be best if you did not take cash out from the other envelopes, as that would create a shortfall in another budget category.

Pros And Cons Of The Envelope Budgeting System

Before you decide to make an envelope budget for yourself, you must know about the apparent pros and cons of the envelope budgeting system.

Pros

• It helps to avoid overspending by allowing a granular understanding of your monthly spending.
• Encourages the habit of tracking the money you are spending.
• It helps in saving money.

Cons

• More time taking and tedious than other methods of budgeting.
• It could be easy to forget about an expense.
• It does not provide the convenience or security a debit or credit would provide while making certain payments.

How Much Money Are You Supposedly To Put In Each Envelope?

There is not a fixed amount that is to be put in each envelope. Instead, you should place an amount that will reflect the amount that you would spend on that category for a month.

If you spend $100 on groceries per week, then the envelope should contain $400-500 in it for the whole month.

The Bottom Line

The envelope budgeting system is more of a cash-oriented approach if you think of it that way, although you can use digital envelopes instead of the real ones based on your convenience.

It makes your budgeting structure and your expenses more tangible, but at the same time, it has also proven to be tedious.

If you are only entitled to use cash to make most of your payments, you will end up losing the rewards and securities that debit and credit cards can provide.

Explore More:

• The 50 30 20 Rule: How to Budget Your Income Like a Pro
• Understanding the basics of financial statements: An overview for beginners
• How to Analyze a Cash Flow Statement to Make Informed Business Decisions