What is the Envelope System for Budgeting?

So what is all this about an Envelop System?

How can envelopes help in budgeting and saving money?

Stupid, right?

But wait! The truth is that if you know how to use envelopes to save money, you’ll do just that.

The Envelope System is a method for budgeting, and therefore for saving money and to stop overspending. According to this method, you physically put in your money. You divide your money into a few envelopes. It’s that simple, but if you are in a habit of overspending it can be tough.

In this article, we are going to show you how this process works, and what are its advantages and disadvantages.

Here’s how to envelop system works

Start with a simple thing. Think about the various types of expenses you have to tackle each month.

Then, sort those into as many categories you like, or as few. However, when there are fewer categories to worry about, you’ll have less stress and confusion. You can have envelopes to cater to “movies” “take-out food” and “eating out”, for instance.

Label the envelopes and keep the allocated cash in them. Remember, no cheating! After all, this budgeting technique is for your own good. Cheating shall undo all the positive results you have accumulated till then. In other words, cheating is only going to reverse your gains.

Now, back to the issue at hand, you can divide your money/income any way you want, but one recommended way to do that is the 50/30/20 budgeting system. According to this budgeting system, you spend 50% of your monthly net income on Needs, 30% on Wants, and the rest 20% on savings and debt repayment.

For instance, if your monthly take-home income is Rs. 30,000, you spend Rs. 15,000 on Needs or Necessities, Rs. 9000 on Wants and Rs. 6000 on Savings and Debt Repayment. 

Now that you have seen how it works, let us see what its benefits are.

Benefits of the Envelope Budgeting System

Using this cash-based budgeting system by using envelopes has several benefits.

1. It helps you to avoid debt and overdraft fees, which is more frequent when you use cards to pay. For instance, it is not easy to keep a proper track of your expenses when you use debit cards, credit cards or ATM cards.

2. It stops you from overspending and from overstepping your budget. After all, you are physically dividing up your income into categories. You know your budget for each, and thus there is little chance of buying things on a whim.

3. Most people fail in budgeting because they do not factor in variable expenses, but that is not the case here. You do make space for variable expenses, and thus are not surprised to see the end-of-month budget.

4. Since you’ll be physically organizing and spending cash, you’ll be less likely to misuse your money.

Who can benefit from this?

This method of budgeting is perfect for those who are compulsive spenders and who are new to the whole budgeting thing. This system lets you keep a tab on how much you are spending and how much you are saving. If you want to take charge of your personal finance, this can be the perfect system.