Master Your Finances: Envelope Budgeting Method Explained

What is the Envelope Method of Budgeting?

The envelope method of budgeting is a cash-grounded budgeting system that involves dividing your available spending money into separate envelopes that represent your crucial spending orders. These orders can include groceries, entertainment, transportation, and more. You can also produce virtual envelopes using mobile budgeting apps.

Once you have divided your money into envelopes, you can only spend the money that's in each envelope for that particular order. For example, if you have $200 in your grocery envelope for the month, you can only spend $200 on groceries. Once the money in that envelope is gone, you can't spend any further money on groceries until the coming budget period begins.

How Does the Envelope Method of Budgeting Work?

The envelope method of budgeting is a simple yet effective way to control your spending and stay within your budget. There are the ways to follow:

Step 1: Determine Your Monthly Income

Before you can begin using the envelope method of budgeting, you need to know your net yearly income. This includes all the money that you expect to bring in for the month. Your income sources may include

• hires from a regular job
• Earnings from a part-time job, alternate job, or side hustle
• Investment Income
• Alimony or child support payments, if applicable
• Government benefits, if applicable
• Any fresh benefit that you might nicely expect

still, like tax returns or cash backs, you can also count them in, If you have any single-time income sources for the month. To calculate your average income if you're self-employed and have variable earnings, you can add up your periodic income and divide it by 12.

Step 2: Set Budget Categories

The next step is to choose which categories to set in your account. You can exercise the following categories as a starting point:

• Housing (rent/ mortgage, serviceability, etc.)
• Transportation (auto payment, gas, insurance, etc.)
• Food (groceries, feeding out, etc.)
• Entertainment (movies, musicals, etc.)
• Personal care (haircuts, toiletries, etc.)
• Debt prepayment (credit cards, loans, etc.)
• Savings (emergency deposit, retirement, etc.)

You can add or remove orders as needed to fit your special financial situation.

Read also: Envelope Budgeting: A Comprehensive Guide to Pros & Cons

Step 3: Determine Your Budget Amounts

Once you have your budget categories, you need to determine how much money to allocate to each category. You can use the following guidelines:

• Housing: 25-35% of your net income
• Transportation: 10-15% of your net income
• Food: 10-15% of your net income
• Entertainment: 5-10% of your net income
• Personal care: 5-10% of your net income
• Debt repayment: 5-10% of your net income
• Savings: 10-15% of your net income

These percentages are just a starting point. You can adjust them as needed to fit your specific financial situation.

Step 4: Fill Your Envelopes

Once you have determined your budget amounts, you can fill your envelopes with cash or create virtual envelopes using a mobile budgeting app. Label each envelope with the appropriate category and the amount of money allocated to that category.

Step 5: Stick to Your Budget

The final step is to stick to your price range. only spend the money that is in every envelope for that particular category. if you run out of money in a particular envelope, you can’t spend any extra money in that category until the next budget period begins.

Conclusion

The envelope method of budgeting is a simple yet effective way to control your spending and stay within your budget. By dividing your available spending money into separate envelopes that represent your crucial spending categories, you can ensure that you only spend the money that you have allocated for each category. This can help you avoid overspending and achieve your financial goals. 

So why not give the envelope method of budgeting a try? It might just be the key to achieving your financial dreams.