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Money Tactics: The Envelope Budgeting System

Money Tactics: The Envelope Budgeting System

An empty envelope -

At Money Vehicle, we pride ourselves on our “Money Buckets” system. It’s simple, effective, and absolutely worth a shot. That doesn’t necessarily mean it’ll work for you, of course, but we urge you to try it!

Aside from that, you can try to fold many other “money tactics” out there into your overall financial strategy. Seriously, there might be hundreds of tips and tricks that you can read about and try to implement. We’ve covered some (such as the “avalanche” and “snowball” approaches to paying down debt). Now, we will discuss a budgeting tactic that many people find helpful: The “envelope” budgeting system.

The Envelope Budgeting System in Action

The envelope budgeting system incorporates — you guessed it — envelopes! They can be actual, physical envelopes, but it’s probably a better idea to use bank accounts as a sort of digital “envelope,” in this case. Trust us, your money is probably safer in a bank or credit union than it is in an envelope under your mattress.

With that in mind, the whole system is designed to help you control your spending, and to allocate a specific amount of money to a specific expenditure. For instance, if your rent is $1,000 per month, you’d take $1,000 from your paycheck and put it in a “rent envelope.” That way, the money is set aside, apart from your other expenditures or bank accounts, and you know that it’s properly allocated and ready to be sent to your landlord.

This all depends, of course, on having a budget in place, and knowing what you’ll need to spend your money on on a weekly or monthly basis. But in effect, you could or would have an “envelope” for each expenditure. You could have a grocery store “envelope,” a gas money “envelope,” and even an “envelope” that has allocated funds for saving and investing. 

How you adapt the system to your specific financial system is up to you, but that’s also one of the strengths of the system: It’s customizable!

How to Use “Envelopes” For Budgeting

With the basics in mind, let’s run through an example of how the envelope budgeting system might work in a practical sense.

Let’s say you earn $2,000 per month. Your monthly expenditures total $1,800. You need to take a good look at your budget before getting started, take note, but what you’d need to do is take a look at how your total monthly spending breaks down, and create an envelope for each expense.

Let’s pretend that we’re using actual, physical envelopes and that you receive your entire $2,000 paycheck in cash for the month. Now, let’s say that your spending breaks down like this:

  • Rent – $1,000
  • Loan payments – $200
  • Car payment – $100
  • Food and groceries – $200
  • Saving and investing – $100
  • Miscellaneous – $400

You would take your paycheck, divvy up $1,000, and put it in a “rent” envelope. You’d do the same for each of your other expenses. In the end, all of your monthly income would be properly allocated, and you’d know that your expenses are covered. You’ve effectively “zeroed out” your income, and (hopefully) haven’t given yourself too much room for frivolous spending.

Neat, right? Give it a shot! You never know what might work for you. Just remember: We don’t really recommend stuffing cash in an envelope and hiding it — your money is safer in a bank!

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And check out our white paper: “Strategies for Increasing Financial Literacy Rates Among High School and College Students”

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