Budgeting 101: Envelope Budgeting System

In previous post and videos, I've touched on 2 different ways you could budget, filling out an Excel spreadsheet or using the traditional line-item budget. Today we will focus on using the Envelope Budgeting System (EBS). In this blog, I will discuss what this method is, how does it work, and the advantages /disadvantages.

Alrighty, so the EBS is similar to a line-item budget but simplified, and usually based around using cash ONLY. So with this system, you will figure out what your major expenses are. For me, my major expenses are groceries, entertainment, shopping, and gas. Once you figure this part out you will get your envelopes and label each one with each category. Each envelope will have a budgeted amount of money that you believe you will need for that category each month. If you miss calculated that is okay just be sure to make adjustments as needed (if you choose). These envelopes are your guide to help you stay on track for the moth.

When your cash is gone, you CAN'T spend anymore. You’ve already budgeted for that category.Now, this is the perfect opportunity for you to get creative. Let's say you ran out of money in the entertainment category. Instead of going out stay in the house and watch a movie with yourself or your friends. Get creative with doing things that will cost you little to no money at all. If you run low before the month is over it is important to keep this in mind when planning for the next months budget. Also, be aware of your spending habits. Are you buying things that you REALLY need? I know I can get carried away with my spending sometimes. This budgeting method is good for those who have problems controlling their spending with credit or debit cards, and don’t realize how much they’re spending and where. It also works well for those getting out of debt and those who don’t feel comfortable using cards.

With this system there are some advantages in disadvantages.

Advantages include:

1. It Works! The best part about the envelope budgeting system is that it simply works. If you are only paying for things using cash, and you run out of cash, you cannot possibly overspend. The envelope system has been around for a long time for good reason.

2. It Will Help Discipline You. We all need discipline in our lives to make us better people, whether it is with our spending habits, our eating habits, or our productivity at work. The more you practice being disciplined, the easier it is to take responsibility for other life areas you want to improve.

3. It Can Be Used as an Emergency Fund. Instead of carrying cash, many people carry plastic, which can be a problem if an emergency arises. Though the money in the envelope system is not intended for emergencies, you can always use it for one – like if your car breaks down in the middle of nowhere and you need to pay for a tow or a ride back home.

4. Your Budget Becomes Tangible. The concept of money is much more tangible if you use cash instead of plastic. Credit cards can easily cause you to overspend. When using envelope cash, you will be more in tune with your budget because you’ll be reminded of it every time you reach for an envelope to spend from.

5. No Overdraft Charges. Have you ever been charged an overdraft fee from your bank? If you put away your debit card and use cash instead, you are much less likely to overdraft and get charged the absurd fee.

6. Less Wasteful Spending. When I used an Excel spreadsheet to create my budget, I would look back at the end of the month and be surprised to see what I wasted my money on. However, when you use the envelope budgeting system, you are more likely to think through every purchase. You’re less likely to spend wastefully when you see the money disappearing before your very eyes. In fact, people spend 10% to 15% less when using cash.

Disadvantages include:

1. You Must Go to the Bank or ATM to Withdraw Cash. I really try to avoid going to the bank or the ATM. It is just another errand I have to run in my already busy life as a stay at home mom. But if you use the envelope budgeting system, you’ll obviously have to get cash from somewhere to stuff your envelopes.

2. Getting Started Can Be Confusing. I know that the process I described sounds pretty straight forward, but you will eventually come across situations that can be confusing. For example, if you make a purchase at Target and buy $20 worth of groceries, $20 worth of clothing, and $20 worth of house decor, where do you get the cash from? You will probably need to get it from three different envelopes. You’ll experience a learning curve as you figure out how to stick to your categories.

I hope this method helps you work towards your financial freedom. Survivors we are on this journey together. We will survive this!