What Is The Envelope Budgeting Method?
Budgeting is one of those activities many people dread or just plain avoid. After all, it’s stressful to think about how much money you have, then all the bills you need to pay, plus figure out how to make everything work.
It’s not uncommon for Canadians to feel like they don’t make enough and they have too many expenses to take on anything extra, like an Oakville car loan. While that’s a common reason for avoiding making a budget, it’s also the very reason why you should set one and live by it. Of course, that’s easier said than done.
There are many methods to budgeting. One isn’t automatically superior to all others, but you might find a certain approach works best for you. Plenty of people have found the envelope budgeting method to be quite effective, so it’s been catching on across Canada.
A Brief Introduction
You might have heard the envelope method for budgeting is a hot new fad. While all the fuss around it might be recent, the method has actually been around for a few decades. The fact it’s withstood the test of time is just a testament to the effectiveness of using envelopes to budget.
Obviously, this approach involves using envelopes, just like the name implies. Sometimes it’s also called the clip budgeting system because you can do the same thing with money clips in your wallet, but most people don’t use those anymore.
The basic concept is that you pay for everything in cash, like an Oakville car loan, and you keep that cash separated into different pools by placing it in labeled envelopes. It’s a way to ensure you set aside enough to pay various essentials, and to guard against spending too much on the stuff which isn’t necessary. In other words, it guards against overspending, which can cause a cascade of financial messes.
People love the envelope budget system because it’s relatively simple to learn and use. There are some different approaches to how you employ this system, as well as how you get by in the modern digital world where cash payments aren’t always practical or accepted.
How To Do It
While there are no real hard-and-fast rules for the envelope budgeting method, you should go into this practice with some guidelines. As you use this system month after month, you’ll find that you have your own preferences on how to put everything into practice.
For now, try the following ideas.
Some people only use this method for items which constantly are chewing up their budget, like food or entertainment. You can do it that way, or if you really struggle with pretty much everything, you can use envelopes for every area of spending, including your Oakville car loan.
One of the most important things to keep in mind is that you should be consistent. You won’t see solid results if you use this method one month, then do something else the next. That being said, it’s ok to rethink what categories you use and the amount of money you put in each envelope, because it’s easy to miscalculate things at first.
Some categories you might want to think about could be:
- Eating Out
- Beauty and Toiletry Supplies
- Car Payment
- Car Insurance
- Gym Membership
- Subscription Services
This is by no means an exhaustive list, but it should get you thinking about how you spend your money. This is half the battle with budgeting, since we often spend without really processing what we’re doing.
Calculate Your Budget
This is perhaps the most stressful part of the budgeting process, because you need to take a close look at what you make and how it is spent each month. This can require pouring over saved receipts, bank statements, and other records. While not fun, this is an extremely necessary step.
It’s easy to get overly ambitious and declare that you won’t spend anything on entertainment or decide that your personal expenditures will be zero dollars each month. That might make you feel bold or super responsible during this step, but setting unrealistic budgeting goals actually dooms your efforts for failure. This is where may people set themselves up for disappointment, which can lead to abandoning budgeting altogether.
If you’re doing this process with someone else, that other person needs to agree to the amounts budgeted for each category. A second person who spends money however will throw off even the best budgeting efforts, so getting that buy-in is absolutely crucial.
Now it’s time for the next step.
Count out how many envelopes you need for each of the categories you created. Label each one. Allow yourself to get creative if that helps with your stress or dedication to this budgeting method, even going so far as decorating each envelope so you can quickly tell which one goes to which category. For example, you can put a picture of your car on the envelope for your Oakville car loan.
Some people find it easier to also put the amount budgeted each month on the outside of the envelope. Of course, if that number changes you either have to scratch it out or create a new envelope, so keep that in mind.
Fill The Envelopes
With the envelopes created and ready to go, it’s time to start putting money in them. Likely you don’t get all of your month’s income all at once, so you’ll need to figure out how much you put from each pay period into the different envelopes.
This might require you to sit down with a calculator and some paper. Take your time, because making miscalculations on this can throw off the entire system. Keep in mind the different due dates for certain bills, so you’re not taking out too little cash early on, if a bill is due toward the beginning of the month.
Also, you need somewhere secure to keep all these cash-filled envelopes. If you’re like most people, you’re not comfortable with walking around carrying so much money on you. Not only could a person rob you, it’s possible you might drop and envelope or two accidentally. If you have a secure spot at home to store the budgeting envelopes, that’s best. But you need to be sure to take cash with you before going shopping or doing other items. Some cash you’ll find needs to stay with you all the time, like part or all of your fuel budget, since you usually don’t plan far in advance before using it. This is where different coloured clips for money in your wallet could come really help.
Keep To Your Budget
It might be hard at first, but the envelope budgeting method will help you stay on target for your monthly budget. After all, if you only take $150 to the grocery store and everything totals $167.50, you don’t have the option of dipping into your bank account thoughtlessly using a debit card. Instead, you’re forced to ask for some items to be taken off your bill, which hopefully are junk food.
If you stretch things by borrowing from a different envelope to cover an expense, this system falls apart quickly. The whole point is to maintain some discipline in your spending habits.
This will mean some sacrifices. You might have to eat those leftovers in the fridge you normally avoid, or tell your friends you can’t go out because it will cost too much. While that seems like no fun, having enough to accomplish your different financial goals is liberating and exhilarating, more than making up for your cutbacks.
Reassessing Your Budget
There will come points when it’s necessary to reassess how much you’ve budgeted. Some people even do this once a month, which isn’t a bad idea if you can handle the stress.
Obviously, if you’re not able to cover certain necessary items like your Oakville car loan with the budget you set before, you need to make some changes. Sit down and carefully go over where the shortfalls are happening and why, then create a new budget to prevent such problems in the future.
Whenever a big change in life is coming or suddenly happens, it’s necessary to take another look at how you spend your money. This might be something like the birth of a child, getting married, buying a new car, purchasing a home, etc.
If your income increases because of a promotion or a new job, you need to take that into account. Of course, the smartest thing to do is take the extra and throw it into savings each month, but that might not always be possible. After putting off certain items for a long time, you might find it wise to use part of that increased income to achieve some new goals or replace aging items like furniture, eyeglasses, or a car.
The envelope budgeting method admittedly was invented long before the days of internet shopping and bill payments, like for your Oakville car loan. It’s easy to see immediately that you can’t use cash to pay for things online, so a different approach is necessary. That doesn’t mean the envelope method won’t work, at least not in a modified way.
One approach is to still use an envelope for online expense categories, but instead of putting cash inside slip in a piece of paper with the category budget. As you spend money online, you subtract that from the slip of paper in the envelope. This requires you to immediate record your spending habits and to not go over the amount you designated in your bank account.
If you use websites where you can load a gift card in and use the balance as you go, buy the gift card at a local store using cash. That will keep you from overspending on certain sites, instead of your just using a debit car without thinking twice.
Things come up that you just can’t foresee. While it might seem like an emergency can completely throw off the envelope budgeting method, in reality you can craft your plan to absorb these inevitable events. After all, one thing you can always count on in life is that emergencies will happen.
It’s always a good idea to be contributing to a savings, even if it’s just a little bit each month. That nest egg might be able to soak up some or all of an emergency expense, which is a nice reassurance.
The other option is to shift around money from different envelopes. This should be done carefully and with the full consent of your spouse, if you have one. Talk to businesses you owe money and see if you can delay payments or reduce them for that month, as well as make other arrangements. Of course, eliminating extra spending is always a good place to start.
Before you spend your savings on an emergency or start shifting your budget around, it’s always best to look at other options. Sometimes panic will cause you to make rash decisions, like spend too much to fix a problem, when a cheaper a simpler solution will work just as well if not better.
Sometimes you’ll find that you have cash left over in one of more envelopes at the end of the month. That’s not a bad thing, but you should be careful about what you do with the money.
The best option is to throw that cash into a savings you don’t touch unless there’s an emergency. If you have excess debt you’re trying to pay off, for example your Oakville car loan, you always have to option to use a portion of that money to tackle the problem. You might want to consider spending a small portion on something as a reward, like dinner out or a fun activity.