What is Envelope Budgeting and How to Plan Your Finances with It?

envelope budgeting

You make a budget every month; try to adhere to it with the help of MS Excel and other budgeting apps, but unfortunately at the end of every month you reach at the same point’- you have overspent. This scenario feels familiar to most of the people. You try to manage your expenses and save money but you get failure every time. You can blame your credit card, but actually by swiping them without giving a second thought about the need, you’re just hampering your financial status.

If you are not careful with you spending habit, you may not know how much you are spending every month and how much money is left in your account. To overcome this, we have come up with a unique and effective budgeting system known as envelope budgeting. After you get familiar to this system and implement it in your life, trust us, you will never overspend again.

Envelope budgeting is basically keeping hard card allotted to each envelope marked for a certain expense. The best advantage of the envelope budgeting is that you need not to depend on your use of plastic money or internet banking. To control your expenses you need to stick to hard cash. Once you run short of cash, you try spending less and that too with diligence.

Here is How to Make Envelope Budgeting an Effective Activity:

  1. How Much of Discretionary Income Do You Have?

Before implementing envelope budgeting you need to determine your discretionary income. It is the income which is left with you after you clear all the necessary bills like utilities, rent, credit cards, etc, and keep aside your investments and savings.

  1. Draw a Budget

After determination of discretionary income, you need to draw your budget. Allocate the amount left with you to various expenditure categories. Common categories include clothing, groceries, household goods, gifts, entertainment and food. The allocation can be done by checking and analyzing previous account statements. Now, based on your analysis you can build a budget.

Read More: 3 Financial Tips to Tackle Overspending Habit

  1. Envelope Time

After allocation of funds to each category, you need to assign an envelope to the categories and transfer the amount to their respective envelopes.

  1. Note the Expenses

You can spend just the allocated amount of money in each category. If anytime you run short of cash under any category, it means the budgets for that category are met for the particular month and you cannot spend for that category until you receive next pay cheque.

  1. What about Debts?

If you have any debt on you, you can clear it up with leftover cash in the envelopes. In case there is no such debt, amount should be transferred to your savings account.

Why Should You Use Envelope Budgeting System?

It is because of the fact that it really works. If you have set budgets in terms of cash i.e. definite cash for a category, there are very few chances that you will overspend. With cards, one can overspend as you have no individual budgets and a huge limit. But, with cash you remember budgets, every time you see the envelope. In addition to this, with envelope budgeting system, you will give a second thought before buying any item which will eliminate unnecessary spending.

Read More: Prepare Early in Life to Tackle These 5 Financial Accidents

Some Disadvantages

  • The biggest disadvantage of this system is that majority of people do not want to depend on cash to meet their expenses as plastic money is much easy, convenient and simple.
  • Also, it will create inconvenience as you may need to rush bank/ ATM for withdrawing cash from your account as the system is cash based.
  • Another major disadvantage of this system is that you cannot get benefit of reward points associated with card usage.
  • Additionally, interest free credit period cannot be utilized in case of credit cards. All the advantages linked with cards can be taken as disadvantages of the envelope budgeting.

More Tips on Envelope Budgeting

  • Periodicity of budget: You can choose among weekly, monthly and pay-cheque budgeting. We would recommend implementing pay-cheque budget.
  • Make adjustments wherever required: You can go for a few trials of the system in order to get correct allocation/ budget to different categories. Make the required adjustments.
  • Cut down on your bills: You should also take care of analysis of expenses. For example, if you are spending too much on house rent or internet connection, you can cut down the expenses by switching to some other option.
  • Stick to your plan: You will take some time to get familiar with the plan as you may not be used to spending cash. Don’t quit in those circumstances, instead stick to the plan with a strong will. Trust us, it won’t fail.

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