What is an envelope budget? I asked myself that same thing a few years back. I’d heard people talking about it and I thought to myself, are they really using envelopes? Really just putting cash in them? Doesn’t this seem counter-intuitive to our digital society?
Well, guess what? They were right! It WORKS.
One of the hardest things about changing behavior is just that, changing the behavior. We do things out of repetition because we’ve always done it that way. And that’s where we get into trouble. How many of you spend small amounts of money every day, like getting coffee at Starbucks, or picking up a donut at the gas station? (maybe just my boyfriend? He says they’re good, but they look gross!)
Well, the envelope system aims to change that behavior. I tried this budget and believe me, it works great! It’s a little more work to set up, but so worth it.
It really makes you much more conscious of your spending habits and all the small things you’re wasting money on. It’s far too easy to whip out the credit card and just charge that $4.96 without thinking about it. But it adds up.
Studies show we spend up to $3200 on trivial things like coffee, cigarettes, eating out, etc.
All things that within reason are fine, but they’re little expenses that we don’t think much about, that add up to major spending by the end of the year.
One of the things that are great about the envelope budget is it aims to rectify this problem. Make you patently aware of every extra dollar your spending. It’s a simple process really, just follow a few steps.
- Make a budget– Make a budget and figure out all necessary expenditures, like bills/payments that must be paid. Make an auto transfer of funds into savings/investment accounts. Whatever is left, is your discretionary income. Meaning, income that isn’t alotted to a category. Now if you’ve got debt, I’d suggest you put most, if not all, of this into paying off debt first.
- Set Discretionary Amount– Give yourself a set amount monthly that can be used for discretionary income like eating out, going to movies, buying clothes, etc.
- Divide that Amount– Divide that amount either bi-monthly or weekly
- Withdraw Cash– Withdraw that cash from the bank
- Create Envelope System– Create Envelopes and stuff with cash, either 2x month or weekly depending on preference and when paid.
- Use Only Cash– Spend cash only. This can be daunting and tough for a lot of people. People tend to go one of two ways. They simply freeze up and don’t spend anything for fear of running out, or they spend it all within the first 6 hours. Guess which one I happen to be?!? Both are bad habits. It takes some practice and time to figure out what’s important and what’s necessary. A good rule of thumb is if you’re thinking of spending it on something like coffee, to wait about 20 minutes to see if it will pass. If not, to look around and see if you can make it at home or work without spending money. If you still have the urge, and I doubt you will, then go ahead and get the coffee. But keep good count, cuz within your new lifestyle changes you won’t be able to do it keep up the same habits. In order to make a change, you have to make a sacrifice and that’s tough.
- Put Extra Cash Away– Now if by chance you are ending up with extra cash at the end of the month, put it towards something great. And by great I mean, put it into savings/emergency fund account, or add an extra payment to pay off debt. Chances are at the beginning you’ll spend every dime, and sometimes you’ll spend it quick. But after time, and changing some behaviors, you’ll end up with some extra money. Make sure to move that money to another account, and start fresh when you’re next cycle starts.
Change is hard, I get it. It’s hard for me too. The key to any large budgeting changes or lifestyle changes for that matter, is time, patience, planning, and small deliberate decisions. We are capable of change, it just takes some extra work and planning. Happy budgeting!
