The Envelope Budget System Explained

Cash Envelope Budget System

The Envelope Budget System Explained

The very first step to saving more and spending less is to recognize exactly how you spend your money each month. However, there are various ways to develop a budget and stay with it. So how do you decide what system is the most effective and which will work best with your spending habits? In my opinion, this all depends on your needs and your comfort level when it comes to spending and saving money. In today’s high tech world there are various online applications or apps on your phone that can make budgeting a breeze.

If you are new to budgeting, a widely known method to consider is the envelop budget system. The system was introduced  by Dave Ramsey. The envelope budget system works by primarily using cash as payment. You will also store the cash in individual envelopes based on their budget category. This budget system makes it easier to visualize how money is left. It’s also believes that spending cold hard cash is psychologically more effective than swiping plastic when it comes to saving and control spending.

Below are the steps to get started with the envelop budget system and a way to organize your setup.

Step 1: Compile a budget

Grab a pen and paper, spreadsheet, or download our budget work sheet. Beginning by listing your net income for a month and also add any kind of extra monthly earnings you regularly receive. The total net monthly income will be your maximum spending monthly limit.

Next, pay yourself by making a category for savings. Its important to have a saving category which is one of the steps to increasing your savings.

Then listing monthly expenses, easiest way is to begin with constant bills like housing, cable bill, health insurance, utilities, etc… Breakdown quarterly or multi few month payments as close to a monthly cost as possible. These will be additional categories in your envelope budgeting system.

Last but not least, add discretionary categories, such as:

  • Groceries
  • Entertainment
  • Dining out
  • Gas or public transit
  • Household items
  • Pet expenses
  • Gifts
  • Clothing
  • Charity/Church
  • “Wants” cash (a book, ice cream at the mall, etc…)

Step 2: Automation

One of the most effective and easiest way to save money is when its done on auto pilot. You can save at work with a 401K and If you employer offers a 401K option, use it and continue to invest in your future. When you get a 5% raise, increase that 401K deposit  by 2%. You can also setup automatic transfers after payday to move money seamlessly to a savings account. This makes it much easier to let go of the money being put away for savings as you never saw it to begin with.

Finally established your regular monthly bills that can not be paid in cash by using auto pay to make sure they are paid promptly each month. The idea is to minimize credit/debit card spending and maximize the use of cash.

Action 3: Create an envelope for each optional spending category

Label an envelope for every discretionary category that you produced in the initial step. On the back, jot down the amount available in this category for the month. A coupon binder can be used or special envelop budgeting systems are also sold online.

I like using vibrant colorful envelops that are inexpensive on amazon or my favorite big box store. They’re the perfect fit to stick right into my organizer. I reuse these envelopes each month and use a bit of tape to reinforce them.

Step 4: Pay in cash, cash is king!

In order to be successful using this method, you must use cash and only cash! If it is time for grocery shopping, you must only use the money budgeted in the grocery envelop. Once the funds are depleted there are no more trips to the supermarket.

Step 5: Document your cash spending

Document each cash transaction on the back of the envelop and track the remaining budgeted balance in that category for the month.

Step 6: Save the rest

If you have leftover cash in your envelopes at the end of the month, dump it in your savings account! You can also have long term goals, such as a vacation that you can create envelopes for as well. Saving is the most important, weather for an emergency fund or a vacation. Here are 5 strategies to increase your savings that are sure to help you save more efficiently.

Let us and other readers know about your experiences with the envelope or other budget systems? Share your comments below…

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