It’s the home stretch to the new year and you’re probably looking forward to making grand plans for the coming year. For now, everyone is just busy trying to get through the holiday rush – doing their last minute shopping and checking off their list of what to buy for holiday dinner.
It is the season of giving. What goes unsaid is that – it is the season for spending as well. In the US, the winter holidays are when people spend the most money, followed by back-to-school holidays, Mother’s Day and Easter. To make sure that you don’t overspend during the holiday season, here are a few tips on how to use the envelope system of budgeting.
What is the envelope system?
The envelope system is a system of budgeting that uses…you guessed it…envelopes to allow you to physically portion out your income and divide them into envelopes or categories.
How is it done?
It is a pretty straightforward concept. Determine your specific spending categories and have an envelope ready for each of those spending categories. Here are some examples of categories:
| Sample A | Sample B | Sample C |
| Groceries | Student loan | Eating out |
| Water | Credit card A | Coffee |
| Rent | Credit card B | Movies |
| Debt | Car loan | Drinks |
| Gas | Mortgage | Online purchases |
| Electricity | Utilities | Books |
Your categories will depend on your monthly needs (and wants), so it will look different for everyone. Then, you will label each envelope with a spending category and put actual cash in it to fund that category. E.g. $150 for groceries, $100 for gas, etc. When you have to pay for something or spend on something, you only get it from the corresponding envelope. Let’s take Sample C for example. If you set aside $35 for coffee and get a $5 mochaccino, you’ll take $5 from the “coffee” envelope. That will leave you with $30 to spend on coffee for the month. Once that budget runs out, you stop spending for the month in that category. You can refill your envelopes each month – or even after you get a paycheck which can be weekly or fortnightly.
How can you save money using the envelope system?
- Divide your funds as you see fit, but keep in mind the 50-30-20 rule: 50% of your income goes towards your needs, 30% of your income goes towards your wants, and 20% goes towards your savings and/or debt repayment.
- Remember to pay yourself first, so save up that 20% before you divvy up the rest of your income towards needs and wants.
- Any money left over from your envelopes can go towards 2 things:
- Carried over to the next month.
- Taken out of the envelope and put towards your “savings” envelope.
What to love about this system:
- It shows you exactly where your money goes and how much.
- You’re likely to speed less when you can physically see your available cash instead of spending using a credit card.
What to hate about this system:
- The frequent trips to the ATM
- Carrying large amounts of cash.
Hopefully, the envelope system helps you with your budgeting. What about you? What is your budgeting style? Share them with us in the comments. Remember to work smart and be a blessing to someone today. Stay safe and healthy!
Written by Jaie O. TheHelp