Envelope Strategy

Envelope Strategy

The envelope budgeting strategy is a simple yet diligent approach to managing money. This method is a tried-and-true cash-based budgeting system. Your budget categories are represented by envelopes. Each envelope is then filled with the exact amount of money you can spend on each category. The goal is to prevent you from overspending each month by limiting what is at your disposal. While you may not use cash to pay bills, this strategy still applies. 

Execution…

Step One: Calculate Your Income

The first line item in your budget is your total income (after taxes). This should include all monies earned from your employer, side hustles and any cash that is coming in. Even unexpected money that you receive throughout the month!  (Don’t cheat yourself) 

Step Two: Calculate Your Expenses

Categorize your monthly expenses by splitting them up into the two categories

  1. Needs: Mortgage, rent, car note, car insurance, credit card bill, utilities, childcare, gas, and other expenses that are NEEDED

  2. Wants: shopping, dining out, tv streaming packages, mini-vacation, memberships, and any expense that is not NEEDED

*Be honest in this section as it is extremely important. Identify your needs and wants to help you determine what you can and cannot afford. Remember to keep your savings goal in mind. 

Lastly, perform an in-depth review of your spending habits. Review your bank and credit card statements to discover where your money is going. 

Step Three: Create envelopes based on the above expenses

Create an envelope for each expense you’ve noted above. You can simplify this by combining like expenses (utilities or streaming services) into a single envelope. Most of us utilize online bill pay so the use of physical envelopes is out of the question. You can substitute the physical envelopes with a budgeting app that supports the envelope strategy. 

Step Four: Disburse funds from the envelope

Whether you’re using physical envelopes or a budgeting app, only spend what’s available each month. This is where your discipline is tested. 


Step Five: Adjust

Adjusting monthly is a very important rule of thumb. Our life, income, and expenses change monthly so your budget will forever be a work in progress. The more diligent we are the better. 

In essence…

  1. Set your monthly financial goal

  2. Calculate your income

  3. Determine your expenses

    1. Separate your needs and wants

  4. Fill your “envelopes” with your expenses from the above

  5. Check progress monthly, reward yourself for completing your goal each month