Budgeting With Envelopes

There are many great budgeting apps and programs out there, but a very old-fashioned system is worth special attention. My experience is that most of us spend less when we use actual cash instead of paying with plastic (even if it is a debit card). I’ve also known many people who use programs like Mint and faithfully track their income and expenses but still overspend every month.

If you use envelope budgeting, you can’t overspend. When the envelope has no more cash in it, you stop spending. Simple as that. If you have extra cash at the end of the month in what I will call a “short-term” envelope (like groceries), you can transfer that money to your Emergency Fund or transfer it into a “long-term” envelope (like car repairs).

So, how exactly does budgeting by envelope work? It’s easy, and you can do it with 5 simple steps!

Step 1. Determine Your Discretionary Income.

List all of your mandatory fixed payments, such as rent, insurance, utilities, etc. Add them all up and subtract that from your take-home income. The difference between your income and those mandatory expenses is your discretionary income.

Step 2. Assign Your Discretionary Income To Specific Budget Categories.

After you’ve made all your fixed payments (including your savings), figure out how much of your discretionary income you want to have available for each budget category, like groceries, clothing, gas and, if you can, fun money. If you’re not sure how much to designate for each category, take a look at previous bank statements. You’ll get a pretty good idea of how much you’ve been spending in each of these areas.

Step 3. Label Your Envelopes And Fill Them With Cash.

Label an envelope for each budget category. Put the budgeted amount for each category in the appropriate envelope. If you are paid throughout the month, replenish each envelope accordingly.

Step 4. Use Only Cash.

When you make purchases, take the cash out of the appropriate envelope. Only use cash to make purchases. Once you have used up all your cash in an envelope, you are done with that category.

You may find yourself with an empty envelope in one category and need to transfer money from one envelope to another. In my family this sometimes happens with our “gifts envelope” when one of my four kids gets invited to a birthday party we did not anticipate. Try to minimize the amount of borrowing that takes place between envelopes. If you find that you are short in a category every month, then readjust your budget.

Step 5. Save Any Extra Cash.

If you have extra money at the end of the month in any of the envelopes, you have two ways to deal with it. First, if you have any debt (such as tax debt or student loans that were not discharged in bankruptcy), you use any leftover cash to put toward that debt. If you don’t have any debt, put extra cash into your Emergency Fund or savings.

There are many advantages of the envelope system. First and foremost – it works! If you are only using cash to pay for things AND you stick with the program, you can never overspend! This system will help develop self-discipline. Your budget becomes something very real. You’ll find that your spending will be more streamlined and that you won’t be wasteful. You will also avoid overdraft charges. An overdraft fee can easily turn a $5 spent on fast food into a $35 meal.

It’s an old-school method to be sure, but there’s a reason envelope budgeting has been around as long as it has. It works. Try it out!

For more information contact your Stockton bankruptcy attorney.