Envelope budgeting
Envelope budgeting is a method of budgeting where you physically divide cash into envelopes labeled with different expenses, such as rent, groceries and entertainment. Once the cash in an envelope is gone, no more can be spent in that category for the budget period.
The idea behind envelope budgeting is that it helps you to control your spending by giving you a visual representation of how much money you have left to spend in each category. It can also help you to avoid overspending by making it more difficult to access cash when you’re out of it.
Here is how it works:
Identify your expenses and income.
Allocate cash to envelopes for each expense category.
Use cash from the envelopes to pay for expenses.
Once the cash in an envelope is gone, no more can be spent in that category until the next budget period.
Track your spending throughout the budget period to make sure you are sticking to your budget.
Envelope budgeting can be a good method for people who have trouble controlling their spending, or for those who prefer to use cash instead of a credit card. However, it does have some limitations – for example, that it does not work well for online or recurring payments, and can be difficult to manage if you travel frequently or have irregular income.
Who should try this method?
If you are someone who struggles with overspending, this is a great way to help correct that. Having a visual representation of how much money you have to spend and how much money you have spent is a very good way to assist with overspending.
Considerations
Envelope budgeting is a simple and effective method for controlling spending, but there are some considerations to keep in mind when using this method:
Cash-only: The envelope budgeting method requires that you have cash on hand to allocate to each expense category. This can be difficult if you don’t have access to cash or if you prefer to use a debit or credit card.
Difficulty managing irregular income: If you have an irregular income, it can be difficult to know how much cash to allocate to each envelope. This can make it difficult to stick to your budget.
Online and recurring payments: Envelope budgeting is a cash-based method, so it does not work well for online payments, or for recurring payments such as bills that are automatically deducted from your bank account.
Traveling: It can be difficult to manage your budget when traveling, as you may not have access to cash, or you may need to withdraw money in a foreign currency.
Limited tracking and reporting: Envelope budgeting does not provide detailed tracking and reporting like digital budgeting methods, so it can be difficult to know exactly how much you have spent in each category.
Security: Carrying cash around with you can be a security risk, and if you lose or misplace your envelopes, you risk losing your budgeted money.