Recently, my family moved to an envelope budgeting system whereby we spend only cash for basic household categories such as food, entertainment and a few others. We place cash in budget envelopes and spend accordingly. When the envelope is empty, we’re finished shopping for that particular month.
Listed below are the steps we took to implement our envelope budgeting:
- Determine categories for your envelope budget. Not everything in your household budget can fit into an envelope, literally. Things like utilities, subscriptions, and other recurring monthly bills are typically paid online or via bank draft. The real spending categories we are interested in are discretionary spending categories. For our family the typical categories making up our envelope budget are food, household products, gifts, entertainment, and clothing. In the beginning we also included gasoline, but the pay-at-the-pump feature is just too convenient to pass up on a cold, rainy day, so we still use our debit card at the pump. Who wants to carry kids into a convenience store to pay for $30 worth of gas in cash?
- Use past spending to establish initial budget amount. Review your previous month’s spending record to indentify transactions that belong into each spending category you have budgeted. In our case, a $50 Target store transaction may break down accordingly: $25 on groceries, $10 on clothing, $15 on household products. Using your best estimate come up with an average monthly expenditure for each envelope budget category.
- Create a budget envelope for each spending category identified in the previous step. Record the category and monthly amount on each budget envelope. If you are paid twice a month, plan to fill the envelopes on payday, rather than the first of the month. If you have enough cash on hand to fill the first month up front, try a monthly budget plan right off the bat.
- Stop spending for a particular category when budget envelope reaches zero. To guarantee the success of an envelope budgeting plan you have to stick to this rule. When you run out of money in your “Entertainment” budget envelope, you cannot take $20 from “Food” to cover a movie. You have to have the discipline to skip a night out.
The envelope budget is a great way to get a quick handle on your finances. However, I’m not sure it is something that can be sustained long term, simply because of the amount of tracking and planning it requires. If you are in need of a quick budgeting plan, and are currently lacking the discipline to use a debit or credit card, I would definitely give envelope budgeting a long look.
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