If you’ve stumbled on one of my blogs before you likely know what I believe is the most important thing you can do in your finances. For those of you that are new (welcome!), I’ll let you in on the secret; have a budget.
A budget not only gives you guidelines and boundaries with your money, but it also it sets you up to achieve your goals. It’s like the blue print to a home. Before you can begin building, you have to know what you’re working with and where you’re headed.
However, a blue print is useless if the builder chooses to ignore it during the building process. This happens a lot in our finances. We set up a budget that looks great on paper, but we don’t stick to it.
One of the best ways to stick to a budget is to use the envelope system. These are the 5 most common questions I get about using the envelope system.
What in the World is the Envelope System?
The envelope system is a way to track your spending and ensure that you don’t go over. While there are a few different ways to do it, I highly recommend you start out with cash.
Once you complete your budget, take some envelopes and designate them to different categories. So for your grocery fund, write the word “Grocery Fund” on the envelope. Then, stick the amount of cash that you budgeted for groceries into this envelope.
When you go grocery shopping, take this envelope and pay cash for your groceries. The beauty of this method is you can’t accidentally overspend. When the envelope is empty, you no longer have money for groceries that month. You then have to make a conscious choice; either find the money elsewhere, or try and make it until the end of the month without another grocery trip.
What Categories Should I Use?
Your budget will have two types of expenses; fixed and variable. Your fixed expenses are the things that typically stay the same such as your rent, mortgage, or debt payment. A variable expense is something that can change month to month, such as your entertainment, gas, and grocery fund.
Envelopes are best used on variable expenses that you might accidentally go over budget. Things like your water bill (which are variable) don’t need an envelope because you’re probably not going to send the utility company too much money.
The most common categories for the envelope system are food, entertainment, gas, clothing, and fun money. Decide which categories in your budget would benefit from a cash envelope.
What if I Run Out of Money Before the Month Ends?
This is going to happen. At some point you’ll run out of grocery money or gas money with two weeks left in the month. What can you do? Your car needs gas and you need food, so going without isn’t an option.
In this situation, you need to sit down and tweak your budget for the month. Let’s say gas prices went up and your envelope wasn’t quite enough to make it through the month. Sit down and see where you can pull some extra cash from within your budget. Is there still some money left in your clothing envelope? Maybe you have a surplus in groceries that you won’t necessarily need? Find an area where you can pull a little cash to help make ends meet.
If this is happening multiple months in a row, that means you’re under-budgeting and you may need to allocate more money to that category.
What if I Have Money Left Over?
So the month ends and you have some extra cash left in your entertainment envelope. Hooray! What can you do now?
One option is to spend it! If you budgeted that money for entertainment, take it and go out to eat or go to a movie. It’s incredibly important to enjoy some of your money.
If you’re working hard on a financial goal, such as paying off debt or building your savings, you can roll that money into that. If you had $50 left in your clothing envelope, send it to the credit card company as an extra payment.
However, if this keeps happening every month, it’s important to adjust your budget accordingly for this situation, too. Maybe you’re over-budgeting this category and you can allocate that money elsewhere.
Cash Won’t Work for Me. What Can I Do?
Sometimes people say cash envelopes won’t work. What if you have a spouse? Who carries which envelope around? What if I need money from an envelope and they have it?
Try using two envelopes for certain categories. For example, let’s say you budget $500 per month for groceries. Set up two different grocery envelopes and decide how you want to divide it. Whoever does the bulk of the grocery shopping should carry a majority of the money. Maybe they take $400 and the other spouse takes $100. That way if they need to stop for milk on the way home, they have some cash to do it.
I’ve had people tell me they don’t feel safe carrying that much cash. I completely understand that. One option is to keep the money at home and to only carry a little bit of it at a time.
Another option is to use your debit card. There are apps, such as the everydollar.com app, that allow you to track your electronic spending. This is how my wife and I use the envelope system. Whenever one of us makes a purchase, we enter it into the app and it shows how much money we have left for the month. The hardest part about this is remembering to enter every purchase. Forgetting to log a grocery trip can really hurt your budget.
Ready to implement the envelope system? Need some help putting that budget in place? Shoot me an email and I’d be glad to help you!
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