Updated: January 25, 2021
Do you have the habit of spending more than you earn? Are you finding it hard to get out of bad debt? Is it difficult to live within your means?
If so, then maybe you should start a personal budget system to account for your monthly expenses.
There are many ways to do this but one of the most effective and often talked about methods is the Envelope System.
It’s easy, practical, and very effective. Here’s how to do it below.
The Envelope Budget System in Eight Easy Steps:
Start by tracking your daily expenses. It just takes a few extra minutes each day.
List down all your monthly expenses. Consult your daily expense notebook to check some items which you might have forgotten.
Group the list into categories. Make sure that you include everything.
You can start by grouping them into general categories such as Shelter, Food, Clothes, Utilities, Transportation, and Personal.
You can also choose to further divide them into subcategories until you have a comprehensive map of where exactly your money goes every month.
Get some envelopes and label each of them with the expense classifications you defined. When you’re done, add one more envelope and label it, Pay Yourself First.
Next, create a budget. Distribute and allocate your current income into the envelopes. Make sure that you fill in the Pay Yourself First envelope before the others.
Keep your envelopes in a safe and secure place.
Plan your day and bring the envelope which you might need for your expenses.
You can choose to bring just a certain amount and not the whole envelope for security purposes. For example, if you’re planning to go to the mall with friends, instead of bringing your Food Envelope, which usually contains a large sum, just get a few bills. Do the same for your Transportation and Personal envelopes.
At the end of the month, whatever is left in the envelope is carried over and added to the next month’s budget.
That’s why it is important not to spend everything in the envelope so that you can save up for bigger purchases and unexpected expenses.
For example, if your monthly clothing budget is just P1,000, then you will be inclined not to spend it if you want to buy a P2,000 pair of jeans next month.
- Put your receipts into the envelope from where you took the cash from. That way, you’ll be able to easily track exactly where your cash was spent on.
- Instead of carrying over what’s left towards next month, you can also choose to deposit the money left into your savings account.
- It is recommended that you use your income from last month for your current month’s expenses. All your earnings for the current month should be kept and saved for budget allocation next month. If this is not possible then try to adjust your spending habits until you have achieved this.
- Try not to “borrow” money from other envelopes. You should discipline yourself to spend the allocated money only for its assigned category.
Remember that this is a dynamic process, the Envelope System entails constant planning, tracking, analysis, and adjustments to your budget allocations and spending habits until you have successfully gotten yourself out of debt and comfortably living within your means.
Lastly, the best part of doing this envelope system is that you don’t have to worry much about saving money because your Pay Yourself First envelope is automatically doing that for you.
Alternatives To The Classic Envelope System:
You can alternatively choose to keep your income in the bank and use paper money to represent your cash allocations in the envelope. If you have an old Monopoly board game, then this shouldn’t be a problem.
Cutting out pieces of paper and writing down denominations is also a viable option. Just be sure to take out the paper money at the end of the day to represent your daily expense and be sure to account for the remaining budget in the envelope so that you won’t overspend in that category.
You can also choose to make a worksheet on your computer to make your virtual envelopes. I personally think that this is the best way to practice the Envelope System because it is secure, practical, and more comprehensive because it can do your computations and analysis automatically to save you time.
Photo credit: ollily