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Envelope Budget System

How To Budget With The Envelope System Of Home Budgeting

The Envelope Budget System or "the envelope system" is a simple cash-only budgeting system using ordinary letter-style envelopes to keep track of monthly spending. It works well and is very easy to set up and maintain.

You label envelopes for each cash account or spending category and then put the cash alloted for each account in its envelope each payday. Why cash? Because you can see and feel it; it's "real" and easier to keep track of than a bank balance. Why each payday when it's monthly spending we're tracking? Because it's easier to supply a payday's worth of cash, and it's easier to plan a month's worth of spending.

Instead of envelopes, some people prefer to work this home-budgeting method using labeled glass jars or a set of kitchen canisters. It's akin to the old-fashioned custom of storing a rainy-day fund in a cookie jar. You can use envelopes or empty jam jars or whatever containers you prefer, but the important thing is that you use the system.

Here's how to set up an Envelope Budget System in 5 easy steps:

1. Determine The Envelope Cash Accounts

First, decide which cash accounts to include in your envelope budget system. These days, we can't expect to pay cash for everything in a typical household budget. Some basic, recurring bills like utilities and telephone are more easily paid online or by automatic bank account withdrawal. The expenses we need to gain better control of deal with our discretionary spending.

So, we need to create cash accounts for items like food, cleaning products, clothing, gifts, and entertainment. You may think of others depending on your lifestyle and need. Retire your credit cards and determine to pay as much as you can by cash from this point on.

Aside from your various expense accounts, you should create an extra account for either savings or debt. If you are currently debt-free, create an account named Savings wherein you place up to 10% of your take-home pay for emergency situations or possible investing later. However, if you are currently in debt, create an account named Debt Help wherein you place up to 10% of your take-home pay to help pay down your debt.

2. Establish Budget Amounts

This is the tricky part in the envelope budget system. You have to determine how much cash you can spend each month for each discretionary account. You don't want to allocate too little and not meet your needs, nor do you want to allocate too much and continue to over spend.

If you've made a habit of keeping purchase receipts, you've made your job easier. Simply gather your bills and receipts for the past 12 months and sort them into piles according to the companies or item categories that cost you money regularly. For instance, you might have a pile of clothing receipts, a pile of grocery receipts, and another pile containing charitable receipts. These piles will correspond with your cash accounts. Now, calculate the average monthly expense over the past 12 months for each pile.

If you're like most people, however, you won't have kept your receipts. Therefore, you'll just have to estimate or best-guess your average monthly expenditure for each expense category you include in your envelope budget system.

Now comes the moment of truth. Add up your monthly expenses and compare the total to your monthly take-home pay. Does your monthly income cover all your monthly expenses? If it does, you're laughing all the way to the bank. If not, you need to either increase your income or cut your expenses. Cutting down on monthly expenses is usually the best option because it forces us to review our spending habits and stop buying things we don't need.

Budget Percent Calculator

It's helpful to examine household budget spending on a percentage basis based on suggested spending guidelines. This can often reveal areas of over spending. For instance, if you should only be spending 5 to 10 percent of your net income on recreation, yet you're currently spending 15% or more on movies and eating out, it's no wonder you're always running short of cash. Here, you need to bring your recreational spending in line with your overall budget.

I've provided the Budget Percent Calculator to help you review your spending. Just enter your net income into the calculator and you'll be able to instantly see how much you can safely spend for each major expense category. As you allocate a monthly spending amount for each cash account envelope, you might need to adjust your spending habits to fall within the suggested guidelines. Try to keep your expense totals within the recommended Low End-High End ranges for affordable, balanced spending.

3. Create An Envelope For Each Cash Account

Take a regular-sized envelope and clearly write the account name and the monthly amount you've budgeted on the front of the envelope. Do that for each cash account in your envelope budget system. Now add the specified amounts of cash to the envelopes and store them in a secure place. The amount in each envelope is all the cash you can spend for that account in the month.

It's unlikely that you'll be able to add a whole month's worth of cash to each envelope if you're paid weekly or every two weeks. If that's the case, simply divide the monthly amount by the number of paydays you have in a month and apportion the correct amount for the pay-period.

Or, here's a much easier way...

Envelope System Calculator

Since you know how much you can spend each month in each category, you can use my free Envelope System Calculator to do the hard work and help you determine how much cash to place in each envelope at each payday.

Just enter your net monthly income and the amount for each expense category (including the non-cash categories like utilities and telephone) into the calculator. This specialized expense percentage calculator will automatically convert the category amounts to percentages.

Finally, enter your paycheck/disbursement amount and the calculator will instantly determine how much cash to place in each expense envelope for that paycheck. Setting up an envelope budget system couldn't be easier.

4. The Envelope Budget System Rules

You MUST abide by the following rules for the envelope budgeting system to work and produce results:

You can't "borrow" from one envelope if you develope a shortage of cash in another.

You can't add additional money to an envelope once it goes empty. It must remain empty until your next payday.

If you have significant cash left over in one envelope, it has to go to either the Savings fund or the Debt fund.

You buy nothing on credit. If there's no cash in the envelope, you can't buy anything until you refill the envelope on your next payday.

5. Review, Adjust, Continue

Expect it to take a month or so for the cash envelope system to balance out and work smoothly. That's because some bills are due at different times and in different amounts. For instance, there might not be enough cash in an envelope the first month or two to cover a major purchase, but there will be over time. And you might have to adjust amounts if you find that you allocated too much to one envelope account and not enough to another.

The goal in using the envelope budget system is to learn to live within your means by knowing what you can afford. If there's not enough money in the envelope to buy an item, then you can't afford it. Yes, it'll be tough at times, but your accounts WILL be balanced.

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