People across the country often make expensive purchases, like buying new smartphones, cars, and clothes. When unchecked, such purchases can strain one’s finances, prompting one to look for effective financial solutions to limit overspending. Envelope budgeting (also known as cash stuffing) is a budgeting method that has been gaining popularity recently. This approach helps one track one’s monthly spending habits and encourages one to adopt budgeting strategies to grow one’s savings.
Overview of envelope budgeting system
This is a practical approach to managing one’s finances with a focus on discretionary spending. The envelope budgeting system works by signing physical or digital envelopes to separate expenses into different categories, such as groceries, entertainment, travel, personal care, and more. Each category is allotted a set amount of money. Once the cash in each envelope is gone, one’s spending halts until funds are replenished, usually at the start of the new month or pay period.
This money-oriented approach to budgeting can help those who are new to financial planning and those who struggle with discretionary spending. It enables one to set goals and determine how much to spend and save. Experts recommend the system to those who want to take control of personal finances, track expenses, and excel at financial planning.
Key categories
The envelope budgeting system is ideal for various expenses, such as dining out or purchasing groceries. It can change slightly every month, depending on one’s spending habits. Some common categories of an envelope budgeting system include groceries, entertainment, dining out, clothes, gas, personal care items, subscription management, and miscellaneous. For instance, an outdoor enthusiast will create envelopes labeled “camping” or “trekking” to allocate funds for these activities.
This approach can be useful for people who prefer a visual representation of their spending. One can also adjust this method to work with online spreadsheets and other budgeting software.
Steps to implement envelope budgeting system
The envelope budgeting system follows a specific sequence to help one improve one’s money management skills.
1. Set a budget
The envelope budgeting system is seamless because it ensures that one has enough money to cover the necessary expenses. After receiving a paycheck (after tax), one must decide how much money to set aside for each envelope. It is important to consider fixed expenses, such as rent, savings, and debt repayment, before assigning funds for the envelopes.
2. Create envelope categories
After setting a budget, one must write each category name on the dedicated envelope. Even here, one can decide how niche the paper cover must be, whether broad or specific. The individual could have a general “outdoor fun” envelope or classify money into individual envelopes for “movies,” “restaurants,” “concerts,” and so on. Label each envelope and fill it with the pre-planned amount. This is typically the “cash-stuffing” part of the process.
3. Limit spending to the envelopes
After paying for something, an individual must use the money only from the designated envelope. For instance, if $50 is kept aside in an envelope marked “cafe,” and one purchases a $5 coffee at Starbucks, one should take money only from this envelope. That would leave $45 to spend on other cafe-based items for the rest of the month and ensure spending remains within the set budget.
4. Allocate more funds at the end of the month
To ensure one follows the system without fail, replenish the funds in each envelope at regular intervals, say, at the end of each month or when one gets paid. Following the cash-stuffing method will help one learn financial discipline and grow one’s money over the long haul.
5. Review and reconsider
There is no fixed amount that one must put in an envelope. But, if one isn’t sure how much money to set aside, reviewing past expenses for a month or two can help. This helps one identify categories where one tends to spend more. One might even find surprising expenditures during this process, which could help cut back on unimportant categories and focus more on the essentials.
Traditional vs. modern envelope budgeting system
While this money-management approach primarily relies on physical envelopes, there are various envelope budgeting apps available today that perform the same functions. Most budgeting apps are user-friendly and let one allocate funds directly from one’s bank account. Some apps may also offer additional features, like a budget calculator and planner, for a monthly fee.
Alternative investment methods
The envelope budget system may not work for each individual. In such cases, there are several alternative strategies one can explore.
- 50/30/20 strategy – Here, expenses are grouped into three budget categories—needs, savings, and wants. In this method, one should assign 50% of one’s budget for needs, 30% for savings, and 20% for wants.
- Zero-based budgeting – The approach lets one decide how to use each dollar of one’s income. It involves deducting all expenditures from one’s earnings. Any leftover money must be put toward a planned expense, like savings, paying off credit card debt, or investing, until one reaches a $0 balance.
- Reverse budgeting – In this type of pay-oneself-first approach, one must see that all monthly obligations and savings goals are funded first without taking on more debt. Any remaining money can be placed in the envelopes.
