Let’s face it: budgeting is difficult. Even if you have a stable job and good income, there are still times when it’s hard to juggle money around. Sometimes it’s just difficult to keep track of the little purchases here and there (until they add up). Other times a sudden expense pops up like home repairs or someone gets sick. For many people, the only way to be able to budget money is by using a step-by-step saving method.
If you are one of these people, one possible money-saving method that you can use is the envelope method.
The idea behind the envelope method is simple: when you have cash on hand, you separately place it into different envelopes. Each envelope represents a particular expense that you need to settle and these expenses are usually recurring ones, such as rent, mortgage payments, utility bills, credit card bills, and groceries, to name a few. You must use a regular time frame for each period that you put money into the envelopes. For simplicity’s sake, most people use a monthly period since this is when most major bills are due.
There are two main strengths of using the envelope method. First, since you have already set aside money for payment, you won’t struggle to scrounge up the cash once due dates roll around. Second, you will be forced to keep your spending habits in mind because once an envelope is empty, you won’t be able to spend money on that particular category until the next period comes along. You will then be forced to prioritize your spending, which leads to a decrease in sudden cash splurges.
Here is a simple guide to starting the envelope method.
The first thing you need to do is to know just how much money you actually have on hand to spend. If you have a stable job with a fixed income every month, this can be easy. However, if you have several sources of income or different amounts that come in, it might be more difficult. Whatever your situation, you need to arrive at an amount that’s reasonable and that you can stick with for a long time.
The next step is recognizing what your major financial responsibilities are, such as your mortgage, car payments, utilities, and so on. These categories can either be fixed (house and car payments) or variable (utilities, credit card bills, and groceries). Once you have determined the different categories, you need to set a spending limit for each one. The total amount of your spending limit should not exceed your total income. In fact, it might be wise to budget it under your income so that you still have a buffer for sudden and unforeseen expenses.
Label each envelope. This serves as your guide for payment. Of course, you need to have envelopes available! If you’re committed to using the envelope method for a long time, you will need quite a few envelopes. Buy inexpensive blank envelopes online and label them to get started.
Once you have each envelope clearly labeled, you can now start putting the cash inside the envelopes. Place the allocated amount in each envelope.
When the due dates come around and you need to pay, simply bring the corresponding envelope. Do not bring the other envelopes so that you won’t be tempted to juggle the cash around.
Using the envelope method for the first time can be challenging, especially if you are used to being free and loose with your spending. Often times, you have to change your mindset and be strict with yourself for this particular method to work.
As with most things, however, it can become easier over time. The longer that you use the envelope method, the easier it becomes for you. You might even find that your attitude towards money is changing. You might start wondering whether a certain purchase is really worth the expense. Many people have even reported that one significant positive effect of using the envelope method: they rarely miss payments! Having a physical reminder of a payment makes it easier to remember, and setting aside the money early means that you won’t have to worry about where to get it once the money is needed.
At the end of the day, the envelope method will only work for you if you WANT it to work.