The Envelope budgeting system is yet another budgeting method. It is a very visual method of maintaining a budget. It sounds old-school but it is very effective. The premise is that cash is allocated to all categories in which you need funds in your budget and placed in separate envelopes.
If the money in the clothing category is used up, then you have run out of money for additional clothing. This is a method often recommended by Dave Ramsey. The advantage of this method is that, it makes you think about the process of spending your hard earned cash and therefore leads to less impulsivity with your money.
You have to make a budget ahead of time, allocate money to your categories, and make choices of how much to spend or not spend depending on how much you have left in the envelope. I really like this idea in stead of using a credit card because you don’t have to worry about making payments at the end of the month or paying interest. The Envelope system leaves no room for guess work when managing your money.
Another way to use the envelope system is to take into account that many payments come directly from your checking. On paper, you will account for each bill that you pay during the month. Create envelopes for each category for example groceries, gas, clothing etc and allocate funds to each category.
Whatever money is leftover in a category for the month, you roll it over to the following month. This usually happens in some categories like the car maintenance or clothing. You may not have to purchase clothing each month or have to change your car oil. By rolling over the funds, incases of big car maintenance jobs, you will have accumulated enough money to take care of any issues without them becoming emergencies.
The envelope budgeting systems works in such away that when you allocate, for example $400.00 for your groceries for the month. Once you have used all the money in the envelope, there is no more spending in that category until the following month.
The cash you have is all you can spend so you should avoid writing checks, using a debit card and most of all NEVER use your credit card to buy extras.
It takes a couple weeks to accurately execute the process. Keep revising your envelope system until you get it right. If you are paid bi-weekly or your income is irregular, the principle remains the same. But once you have all your categories and money allocations streamlined, it will be like second nature to you to use the envelope system. A budget is meant to be a roadmap of what you intent to do with your money. Be intentional, conscious and focused with your money matters.