How to Budget with the Envelope System

The envelope system of budgeting is where you divide your expenses into categories and "fund" those categories monthly, or when you receive your paychecks. As you spend, you deduct your expenses from the corresponding envelope. It can be done by putting cash in envelopes, but now most people do it by setting up a spreadsheet on their computer, using an online program such a Mvelopes, or by pen and paper.

Difficulty: Moderately Challenging

Instructions

1. Determine your required monthly expenses, which are ones that you make payments on every month, and the amount is usually fixed. Some of these would be your mortgage/rent, utilities, car payment and insurance. For bills that fluctuate, like utilities, figure the average monthly cost based on a year's worth of bills. That's the amount you will fund that envelope with monthly, whether you use it all that month or not, as you will be saving the rest for a month when the bill is higher than the monthly amount you budget for that category.

2. Account for your discretionary spending, which are expenses that have a little more flexibility per month. This doesn't mean these categories aren't necessities, but rather are areas where you can save money by shopping wisely. Some examples would be food, clothing, vacation, gas and entertainment. Include an envelope for miscellaneous expenses that won't fit into another category.

3. Compare the total of all the spending envelopes with the total of your monthly paychecks. If your spending exceeds your income, you either have to cut your spending or find a way to earn more money. It can be a hard realization to come to, but spending more than you make is just going to push you further into debt.

4. Track your spending carefully, by saving receipts for everything. When you first start budgeting, sit down several times a week and record your expenses for each envelope. This will allow you to see where you're spending, and help you to plan your spending for the month if you're getting low in a particular envelope.

5. Move your money from one envelope and put it in another to cover a shortfall in another. This will lower your funds in the first envelope, but it will keep you from going over-budget for the month. The key is to control your spending so that you aren't spending more than you're earning.

Tips & Warnings

• If you get off track and overspend one month, don't let it discourage you. Take it as a learning experience and resolve to do better in the coming months.
• The budget you create will likely have to be adjusted in the first few months to account for things you didn't think of when you first created your budget. Your budget should get more specific over time, as you are able to account for all of your expenses over the course of a year.
• Don't get discouraged if the original budget you create shows that you're spending more than you make. Use it as a turning point to get your expenses under control and live within your means.

Resources

• To learn more about budgeting with the envelope system.

[inzolo]

on 8/11/2009 Another option for online envelope budgeting: http://inzolo.com

[piggybankfan]

on 6/11/2009 I use piggy banks to keep track of my budgeting needs - it was a breeze to set it up and its worked wonders (http://trypiggybanks.com)