Envelope Budgeting Explained In 3 Steps: How It Works

Envelope budgeting is a traditional method of budgeting. An individual would get a few envelopes label them eg. rent, groceries etc and place an amount of cash they can afford to spend on that specific category eg. £300 on groceries a month. Every time they go grocery shopping they would take out an amount of cash they want to spend and once they spent all the money from the envelope they can no longer spend on that item of expenditure.

Creating a budget using envelopes

Step 1: Label the envelopes, in other words categorise your expenditure

These categories might include:

• Groceries
• Holidays
• Petrol
• Clothing

Label each envelope with titles as such.

Step 2: Set limits

Set limits on how much you can afford to spend on each category and place the allocated cash in each envelope.

Step 3: Take the right envelope with you when going shopping

Spend from the envelopes and once you run out of funds stop spending in that category. Or you could take out funds from another envelope but than you won’t have as much to spend on that category, so you have to make a trade off.

There are also online systems available which might be more convenient than using envelopes and cash because paying bills in cash is not so convenient, and is more risky as you could lose the cash.

Some of these online versions include:

• Goodbudget
• Or you could also use a spreadsheet or software which you can find online or create yourself

Furthermore, some building societies and banks actually let you create many different savings account, imitating envelopes. For example, Nationwide allows customers to open as many e-Savings accounts as they like, which can actually be named. You can transfer money to these accounts or set up standing orders from your current account.

Benefits of envelope budgeting:

• Stops you from overspending
• Helps you not only manage your spending but also plan your spending which can help you achieve your longer term aspirations as you’ll have the funds to save and reduce debt in the short term
• Helps you increase your savings, because at the end of the month you can put away any surpluses into an envelope labelled savings or you could put it into a savings account with a bank
• Helps you avoid missing payments, this is because it helps you keep all your bills in mind

Check out my YouTube video about envelope budgeting!