As with any household budget, you must first establish spending categories, as well as spending limits for those categories.
Similar to all the other household budgets, your envelope budget is based on the principle that your income must be greater than your expenses.
Although you may use various time periods, I have found that a monthly budget works best when trying to get your spending under control.
Under this scenario, depending on how detailed you want to get, you'll need 10 to 15 envelopes. You will use one envelope per spending category.
I would suggest that you write the name of each spending category (ex. Groceries), as well as your monthly budgeted amount (ex. $400) for that category on each individual envelope. Please do this exercise until all your monthly expenses are covered by an envelope.
Furthermore, to ensure your envelope budget works properly, you will need to divide the monthly allocated amount on each envelope by the number of times you receive a paycheck each month. Write this information on the envelope as well.
For example, as outlined above, if you allocate $400 each month to groceries, and you get paid weekly, that's approximately 4 paychecks per month. So, dividing the $400 by 4 paychecks equals $100 per paycheck for groceries.
Assuming you cash your paycheck each week, take $100 of that cash and put it in your grocery envelope. If you have your paycheck direct deposited, you will have to withdraw this money from your bank account (so you don't OVERDRAFT, don't use your ATM card) in order to put the $100 in cash in the grocery envelope.
You should do this same exercise for every single expense envelope that you created.
If you do not have enough cash to sufficiently fill all of the envelopes, then it should be obvious that you are spending more money than you are making. The only ways to fix that problem are to either make more money, or spend less!
Now, whenever you go shopping or pay a bill, you should take that money for the payment from the appropriate envelope.
As long as you stay disciplined, and follow the rules as outlined above, you will be forced to take control of your spending habits. Once the money is gone from a particular envelope, you cannot spend any more money from not expense category until the envelope is replenished with your next paycheck.
Warning: for this to work properly, you must not cheat! You can make adjustments each and every month to your spending categories and their allocated dollar amounts, but don't cheat the system.
When people have failed using this type of budget, they have inevitably "borrowed" money from one envelope to pay the bill of another envelope. This left them with a shortfall in the envelope a borrowed from.
Again, make adjustments where necessary, but don't cheat the system, or the envelope budget (or any budget for that matter) will not work.
A couple of benefits of this type of budget are:
- there is no need for any fancy computer software
- it prevents you from getting into credit card debt, as credit cards are not used
- it prevents you from incurring excessive bank charges in overdraft fees, as you are only permitted to spend up to the amount of money you earn
The envelope budget truly is a way for you to "get back to basics" and get your spending under control.
To Your Success...