How Does Envelope Method Budgeting work?

In tough economic times like these, budgeting is becoming the mantra to gain control over you finances. There are many types of budgeting that you could adopt in order to restrain yourself from overspending and at the same time enjoying a contended life. One such type of budgeting is envelope budgeting.

As the name suggests envelope budgeting is practicing budgeting with envelopes. So obviously you will need envelopes and you will need cash. This method would not work with credit cards. If you want to practice envelope budgeting, you have to deal only with cash. It may seem very inconvenient, but that’s whole essence of this process. With envelope budgeting you want to make paying for your necessities a comfort, but purchases beyond what you can afford highly inconvenient. The logic is if buying something unimportant is inconvenient, you would automatically be discouraged from purchasing it. Just by playing with your psyche, you can work wonders with your finances.

Steps in Envelope budgeting:
1.Decide how do you want to practice this method. Do you want to go very granular or do you want to start in a simpler fashion? Your response would determine the number of envelopes you need.
2.Next decide what are the heads under which you want to categorize your expenses? Typical expenses would be your house rent, utility bills (phone, television, Internet, power, etc), groceries, monthly bills (credit card, insurance, loan repayment, etc), special expenses (servicing cars, visiting the doctor for minor health problems), accidental expenses (major financial expense due to unexpected reasons), etc. This would be your general heads. If you want to go granular, make a separate envelope for each of the terms in the brackets, and others based on your spending habits.
3.Sum up the average monthly expenditure for heads in each of the envelope. This in effect should reflect majority of your expenses i.e. the ones that can help control your finances.
4.Now distribute your income into each of these heads proportionately. If you get a weekly income, then you must deposit a quarter of the amount for that head in the corresponding envelope.
5.Whenever you plan to pay or to purchase any item you will use the respective envelope.

That is the gist of Envelope Method Budgeting. To implement it, you need to have some discipline – never use the money from any other envelope for other expenses. This is something that you have to follow religiously. Let’s say you want to go out for groceries shopping; then carry the groceries envelope with you. Purchase all that you want and pay from that envelope. If you exceed that limit, you would have to return some goods, come back home pick another envelope and go back again. Not many would be looking to do that. More often that not, you’ll think about it the first time itself and drop off all the low priority stuff from your shopping bag. This is an excellent example of how you can avoid unnecessary spending with envelope budgeting.

One last thing to remember is that you would be dealing in cash for this method, hence take care to place the envelopes in a safe and secure place. You don’t want people to be stealing your hard earned money.