The envelope system isn’t a new way to budget. It is considered one of the best ways of managing your finances. However, this technique isn’t always used well to handle money but when done properly, it can act as an efficient way.
What is the envelope system?
The envelope system is a way of categorising your money to help you budget for a certain period of time, usually week by week. There is no limit to a number of categories you can have, however, keep it to about 3-5 so that you are not carrying too much cash in your wallet. Examples include groceries, entertainment, and petrol.
How does the envelope system work?
Here is an example of how the system works:
You must first budget what you want to spend for the week or month for each category. An example is creating a budget with £200 on groceries, £100 on petrol and £200 on entertainment for the month. This provides a total of £500. Once you have received your monthly wage, you then withdraw £500 from your account and put the money in small envelopes with the categories on them and you place it inside your wallet. You don’t have to wait until the beginning of the month to do it, but it would be easier for you to see exactly where your money is going and to budget correctly. It is important to note that you must only use the money in your wallet for those specific categories. If you receive change and receipts put them in the correct category also, as it will help you remember and give you a visual representation of how much was spent and where. When your money for that category is gone, it is gone. You cannot take more money out to pay for that category. This is where discipline, focus and accountability become key in your finances.
What if I spend all the money in a category?
Don’t beat yourself up about it. These things can happen. Even though it is not ideal, you will know where to adjust your budget for next time.
Benefits of the envelope system:
The envelope system is extremely beneficial, especially if you are new to budgeting and managing your money.
- As this system gives you a visual representation of how much you must spend. It helps you spend less so that you have money leftover at the end of the week or month. This stops wasteful spending.
- Discipline and focus play a larger role in the management of the envelope system as you need to make sure that you don’t overspend and have nothing left over.
- Adjust your budget over the first couple of months to get an understanding of where you are spending so you can budget correctly.
- Do what works for you. If the monthly system doesn’t work try changing the time scale to weekly or fortnightly.
- If you don’t like carrying a lot of cash on you, that’s fine. Another way to use this method would be to write down each purchase at the back of the empty envelope of the relevant category every time you spend in regards to that category. This might be hard to do as you have to remember to write it down but keep the envelopes close to your card so that you see it or keep all receipts from that day and at the end of the day write it all down. Another alternative will be to keep the envelopes at home and carry cash around for 2-3 days at a time.
If you haven’t tried this method and you are struggling to stay within your budget, this may be an option worth trying!