How to Use Envelope Budgeting to Increase Your Savings
Having a hard time saving your hard-earned money each month? Maybe it’s time to consider the envelope budgeting method. This money management strategy forces you to accurately budget your expenses each month by only giving you access to a predetermined amount of money, and the goal is to teach you to gain better control of your finances.
Though the envelope budgeting method might not be suitable for everybody since it requires only the use of cash, it is still a great exercise to help you form a disciplined budgeting habit. So how does the envelope system work, and is it the right choice for you? Here is what you need to know.
What Is Envelope Budgeting?
The envelope system is a money management technique that helps track exactly how much money you have in each budget category for the month by keeping your cash tucked away in physical envelopes. Once you’ve decided how much to budget for each category, you are only allowed to spend the amount of cash available in each envelope. Once you run out of cash, you can’t spend money in that category until the following month.
A recent study has shown that credit cards can often encourage and increase the craving to spend money. In fact, the research also found that many people were willing to buy more expensive products with credit cards due to the less immediate and less tangible feeling of spending money compared to using cash. With the envelope method, you can avoid falling victim to impulse purchases, and also the possibility of incurring overdraft fees associated with cards.
How To Start Using the Envelope Budgeting System
One of the best ways to track your spending and control your expenses is to use the envelope system. Though sticking to this budgeting method can take quite a bit of self-discipline, it is easy to learn and can have a positive impact on your financial life.
1. Create Categories and a Budget
Instead of just combining different spending activities under “miscellaneous,” it’s important to create clear categories so that you know exactly where your money is going and how much is being spent. Some category suggestions include: groceries, utilities and rent, automobile costs, and entertainment.
2. Label the Envelopes
After deciding which categories to include in your spending budget, you’ll next write the names of the category and budget amount on each envelope. This will help you keep track of everything and stay organized.
3. Allocate Funds to Each Envelope
Once you receive your monthly or biweekly paycheck, cash it out and place the allocated funds according to your established budget into each envelope.
4. Spend Wisely
When it’s time to go grocery shopping or pay your bills, take funds from the appropriate category or simply carry the envelope with you on the trip. Make sure to think wisely before every purchase because once you’ve exhausted the funds in an envelope, you are unable to spend more without going over budget.
If you have money leftover at the end of the month, you can choose to roll it over to the next month or use it to pad your emergency fund.
Free Envelope Budgeting System Printables
To help you get started with the cash envelope system, we’ve included free printables you can download and print out. In order to create your own money envelopes, simply cut, fold, and glue according to the instructions.
Other Money-Saving Methods + Printables
The envelope technique is not the only effective way to improve your financial health. Here are two other money-saving methods to provide you with some inspiration.
Participate in a Savings Challenge
If you need motivation when it comes to saving money, why not participate in a savings challenge to keep yourself accountable? For example, a no-spend challenge where you stop buying things you don’t absolutely need, or a year-long saving challenge that’ll help stack your savings account quickly.
Use a Monthly Budget Tracker
Even if you already have a healthy emergency fund, a budget tracker or worksheet will allow you to track how much money you’re earning, investing, and spending each month. Unlike the envelope method, you aren’t restricted to only spending with cash, which allows much more flexibility. Though manually tracking your expenses can take up some time, it’ll also force you to think about potential ways to cut down on your spending and improve your money habits.
We’ve included a Mason Jar Savings Tracker printable below to help you start building your savings in a fun and interactive way.
The purpose of the envelope system is to help you stay in control of your savings and expenses. Once you’ve spent all of the cash in an envelope, it’s gone for the month and you won’t be able to dip into other envelopes. This forces you to stay disciplined and truly make an effort to improve your money management skills and spending patterns.
Even if you don’t consider the envelope system as a suitable budgeting option for you, with plenty of budgeting apps and softwares built around the same concept, you can still manage your spending without having to stick to the cash envelope budget method. Ready to level up your finances? Check out Mint’s budget tracker to get started!