Building an envelope budget.
Digital spreadsheets, budgeting apps and even asking your AI assistant for help until payday – you’ve tried them all, but nothing seems to stick. If modern budgeting tools aren’t working for you, it may be time to get back to basics.
Envelope budgeting, also known as cash stuffing, is a form of money management that predates smartphones. This practically prehistoric system involves a pen, maybe a notebook, and something you can stuff cash into, like envelopes – or jars, for the shiplap-loving design enthusiast (we see you).
Instead of keeping your money stashed in a bank account, your paycheques are cashed, then “deposited” into various envelopes designated for expenses like gas, groceries and savings.
Hard to believe it’ll work? This envelope stuffer cleared $35,000 of debt in 55 weeks, and she’s documented her journey in a vlog series.
Less debt, more cash
For some, the convenience of credit and debit cards can make it easier to overspend. By relying solely on cash for the majority of your expenses, you’re less likely to spend what you don’t have, because your available funds are right in front of you. And when those available funds run dry, there’s nothing left to spend. No credit, no overdraft.
Setting up your envelope budgeting system
Step 1: Figure out your monthly income and expenses
Grab your calculator! Since you’ll be living on cash, you’ll need to know what you’re working with. If you receive a regular pay cheque, this exercise should be straightforward.
If your income fluctuates, that’s OK! An envelope budgeting system happens to be a great way to manage an unpredictable cash flow, because your spending is based on what you bring home. But it’s helpful to figure out what percentage of your income should be allocated to each category.
Now it’s time to add up your fixed expenses, like rent, utilities and groceries, and unexpected expenses, like home repairs and emergencies. This is the stage in the process that might sting a little, because you may be faced with some harsh realities about your spending habits, especially if you’ve indulged in a costly night out or the odd nonessential purchase. So before diving in, take a deep breath.
Ready? Now, review your credit card or bank statements from the last few months to get an idea of what you’re spending on groceries, bills, clothing, etc. When you’re done, add up all the amounts under each category. If there isn’t much left for savings or if you find you’ve been spending more than your income, you’ll need to make some adjustments.
Then, take your income and divide it up among your categories. Everyone’s needs are different, so there’s no standard guideline here. But it’s safe to assume your housing costs, like rent, mortgage and property taxes, will take up a large chunk of your budget.
Step 2: Label your envelopes by expense category
Take the categories you discovered in the exploration from step 1 and label your envelopes accordingly. If you’re a Crafty McCrafterson, you can even make it cute! Check out some common expense categories to get you started.
It’s helpful to view your envelopes as individual accounts that you’re withdrawing cash from. This makes withdrawals feel more official so that you’re mindful of your spending limits.
Step 3: Move your money
Go to the bank, cash your paycheque and tuck your funds away into each envelope. Staunch devotees of this method may cash their full paycheque and deposit cash back into their accounts just before a bill is due.
You don’t have to fully adopt an envelope budgeting system to this degree. If some of your bills are predictable, you can simply leave enough in your account to cover those expenses. Whatever works for you!
When it’s time to buy groceries or head out for dinner, only withdraw what you need from a particular “account” or envelope. And try not to deplete your envelopes too quickly. If you find that an envelope is dwindling fast, you can “borrow” from other envelopes if you need to. Ideally, though, you’ll want to avoid draining your funds entirely so that any leftovers can go towards savings or debt repayment.
What to keep in mind
In addition to living frugally and spending within your means, you can’t forget to plan for your future. And that includes building your credit. When used responsibly, credit can open doors to big buying decisions down the road, like a mortgage or car loan. Even potential landlords or employers may review your credit report before making a decision. So don’t abandon your credit card completely. Reserve it for less common transactions, like hotel stays or car rentals. Just be sure to pay it off right away.
Don’t forget to save!
As you get used to your new envelope budgeting system, you may find yourself with a surplus of funds. That’s the goal, anyway. Here’s what you can do instead of spending it all in one place.
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