What is an Envelope Budget System Anyway?

An envelope budget system is one of the easiest money management and budgeting systems around.

To simplify it, it is where you determine what your budget is put enough cash to cover those expenses each month into an envelope. Then each month you use the cash in each envelope to pay your expenses.

This system worked great when most things were paid by cash. In our present technological world this may not be practical.
 

Basics of an Envelope Budget System

• Keep you from spending more than you budgeted or planned
• Start you in the right direction in managing your money
• Help you keep track of your spending
• Help you create a plan to pay off debt
• Help you to learn the basics of a money management system

Steps to the Envelope Budget System

Follow each of the following steps:

1. Determine what your income is each month

2. Determine what your expenses are each month.

3. Determine what you are planning on spending each month in each area (i.e. rent/mortgage, transportation, food, entertainment, etc.)

4. When you get paid – cash your check or withdraw the money from the bank

5. Distribute the cash to the envelopes as per your plan.

6. Use only the cash from each envelope to pay for each expense. If you run out of money before you run out of month, stop purchasing from that category. Don’t “borrow” from envelopes.

7. If you have money left over in any of the envelopes, revisit your plan the next month to make sure that your plan meets your budget. Excess cash should go to paying off debt, then into your emergency fund.

Example of An Envelope Budget System

Here is an example if you have an income of $3,600.00 a month.

You look at your income and expenses and decide to split your cash as follows:

You spend $3,300.00 of your income each month. You took the cash out and distributed the cash into each envelope. The extra $300 goes into savings to build up an emergency savings fund (to ensure you don’t create more debt), and your long term savings.

As mentioned earlier envelope budgeting may not work in our world of debit cards and credit cards. Instead of using cash you could create different accounts with your bank and link them to your debit card. Then when you pay for an expense you can take it directly to that account. Don’t borrow between accounts.

DO NOT USE CREDIT CARDS for this system unless you pay your balances off monthly and have a history of doing so

One of our favorite budgeting systems is YNAB - It is a software that you can download and operates very much like envelope budgeting.

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This Budget System may be part of your overall personal finance money management plan.

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