Envelope Budgeting Explained

Envelope budgeting does not mean saving money on envelopes. Envelope budgeting is a simple, easy way to budget your personal finances, and save money. Follow these steps to put your envelope budgeting system in place.

1 – Actual Income, Actual Expenses

Pull out your pay stubs, and any other regular income contributor, such as dividends from an investment. Pull out each of your monthly bills, and your last few credit card and debit card statements. Make a list of each regular source of after-tax income. It is important that it is after-tax because that is the actual amount that you get to spend. It is also important that it is regular income, and does not include any sporadic payment or deposits because these cannot be relied upon.

Also make a list of every regular expense, such as your utilities, cell phone bill, and others. Examine your credit card and debit card statements for miscellaneous purchases. For example, how much do you spend on clothing, groceries, gas and eating out? List each of these, averaging them out over about 3 months, so that you get an accurate number.

2 – Cut It Out

After you have made your lists, look over your miscellaneous expenses. There isn’t really much you can do about lowering your utility bills or phone bills unless you change your service plan, but there is a lot you can do about your miscellaneous expenses. This examination is critical in saving money. As a society, we have a habit of just charging it, not really looking at how much we’ve spent. You may find yourself surprised with how much you spend on eating out or on clothes.

You need to set a realistic budget for each of these miscellaneous expense categories. For example, $100 per month for clothes, $400 per month for groceries, $100 per month for eating out or take-out and $200 per month for fuel. It is important to be realistic because the key to the envelope system is to only spend what is in each envelope for each item. Cut out all extras that you can live with out, and cut down all overspending. After you have made these cuts, and done this final examination, make sure your actual income is more than your actual expenses, or you need to go back to the drawing board.

3 – Split It Up

Take out one envelope for every expense that you have, and write the name of the expense and the amount on the envelope. Now, since we live in a cashless society for the most part, you may think this won’t work. Here’s how it will. You are only going to take out cash for the miscellaneous expenses. Put each amount in each envelope. These are usually the expenses that keep us from saving money. For the other expenses, write the name of the expense, amount, method of payment and due date on each envelope. Make sure that you make those payments. The key is to not charge anything, take out any additional cash, or borrow from another envelope. You can decide to use a completely cash system too.

Envelope budgeting is a great way to get your personal finances under control.