How To Use The Money Envelope System

Are you looking for a way to make budgeting easier?

Well, here’s the good news — your search is over! The money envelope system is a simple, proven and powerful way to keep spending in check.

1. Determine your monthly income and expenses

For the next few months, track all your expenses. Hold onto every receipt or record each purchase you make, being sure to indicate which category of expense it falls under. Hold onto every pay stub as well.

After three months, determine exactly how much discretionary income (what’s left after all fixed amounts are paid) you’re left with each month.

2. Create a budget for every expense category

Divide your discretionary income into different categories, such as food, entertainment, transportation and clothing costs. Then, review the way you’ve been spending your money in the last few months to give you an idea of how much you’ll need to set aside for each category.

3. Create your envelopes

Take one envelope for each expense category and mark it clearly. Put the exact amount of cash you’ll spend in that category for the month inside the envelope. Voila! You’ve created your new budgeting system!

4. Stick to your budget

As in any system, following through is the hardest part. With the envelope system, though, it’s a whole lot easier.

Say you need to make a grocery run. You’ll peek inside your “groceries” envelope, take note of how much cash is inside and figure out how much you can afford to spend. Take that amount of money to the store with you, and only use that cash.  There’s absolutely no card-swiping allowed, and no sneaking money from another envelope either.

This way, you’ll be forced to stick to your budget.

5. Reward yourself!

If you find yourself with extra money in any category at the end of the month, it’s OK to celebrate with a dinner out or an expensive drink. Alternatively, you can treat that money as “rollover cash” and use it to enjoy a roomier budget next month.

Tips and tricks

Here are some variations and different approaches to this ingenious system:

• Use a small accordion file folder instead of individual paper envelopes.
• Hate the thought of only using cash? There are apps that help you create virtual envelopes, such Mvelopes. You can also use a cost-free budgeting app, such as Mint or Monefy.
• Trim your fixed expenses. If you’re finding it difficult to stick to your budget, try to cut back on your non-discretionary spending. Add the money you save to the envelopes that always seem to be ill-supplied.
• Create an emergency envelope. Set aside $20 or $50 to use in case another envelope runs out of money.

Congratulations! You’ve got the money envelope system down pat!