Budgeting is about as interesting as watching paint dry. Who likes thinking about money and bills and all those boring things? But what if a budget could put you back in control of those spiralling household expenses and make you feel confident that each time you were going to the supermarket, or buying a treat for the kids, that you were consistenly keeping within your family budget ?
Enter “envelope budgeting” – a super simple, almost basic, way to run the household cashflow and budget that will help you stay out of debt and on top of your family’s financial goals.
What is envelope budgeting?
It’s a back to basics system that relies on using old-fashioned cash and envelopes to allocate household spending. There are no sneaky debit cards, bank fees or charges out to derail you from staying on top of your finances.
Envelope budgeting doesn’t handcuff you from spending, but encourages you to be in charge of your cash flow by allocating one envelope per spending category – so you have one envelope for groceries, another for power, another for phone bills and so on. Each month, fortnight or week (depending on how you like to run your cashflow and when you get paid) you allocate your cash for the time period and put it in the envelope, which should be kept safe and secure and then transferred into your handbag or wallet when you need to buy or pay for something.
Write the name of each spending category and the monthly budgeted amount on the envelopes. If you are paid weekly or bimonthly, divide the total monthly amount for each category by the number of pay periods you have and record that number on the envelope as well.
The beauty of traditional envelope budgeting is that it forces you to stay in touch with your spending habits because once the money is gone from an envelope, you cannot spend from that expense category until the envelope is replenished in the next time period.
An example of envelope budgets in action
This system relies on finding your “spending period” – weekly, fortnightly or monthly – and making sure you can allocate spending categories appropriately. Each week, fortnight or month, you go to the ATM and make just ONE cash withdrawal for your entire expenses for the time period.
An example might be that a $500 cash withdrawal from the week is allocated into the following envelopes:
- $150 for groceries
- $200 for rent
- $30 for petrol and car
- $70 for all utilities like phone, electricity, internet, gas etc
- $30 personal spending money
- $20 savings
When you go shopping or pay a bill, take the money for the payment from the appropriate envelope.
Working out your spending
This is never a fun exercise as most of us end up spending more than we earn! But if you follow the zero budgeting principle and accept that your income minus expenses should equal zero, then you’ll be OK. In other words – spend within your means. You can’t do envelope budgeting if you don’t allocate the costs and categories that are appropriate to your lifestyle. If you’re over on the power spending for the month, then you might need to pinch cash from the grocery envelope to avoid going into debt or reaching for the credit card.
The best way to truly get a handle on all your household expenses is to keep every bill that you have paid for the last year or so and tally them all up into categories. Set up a grid with 12 months at the top and tally up all those bills in the month they arrive in – birthday present expenses, home insurance and those other one-offs that hit you by surprise. Then, add a 13th column where you can tally up the totals for each month, add them all together and divide by 12 to get an “average monthly expense” for household bills. This means that even though you only pay the car registration in September, you can still be putting money in an envelope in May to make sure you have enough set aside.
Some people keep receipts for any money they spend, and put those receipts in the envelope. This can help with seeing how you spend your money (and where you can cut corners). Paying cash, particularly when you have a clear, visual indicator of how much cash is allocated, will probably result in your spending less, overall.
Benefits of envelope budgeting
You can’t spend money you don’t have and you’re more aware of what you’re spending – if you’re using an envelope system, that is. Yes, it’s unbelievably easy to let cash slip through your fingers when you’re not paying attention to it. It’s so easy to swipe cards at the store and not really keep track of your statements to understand where your money is really going. It almost hurts to spend cold hard cash and see it disappear from your envelope. There is a tangible sense of where the money is going and how much is disappearing. You’re more likely to think through your purchases, and hopefully, not spend money where you just don’t need to.
Envelope budgeting in a cashless world
The problem with envelope budgeting is that it depends on the use of cash, something which society is moving away from. Often bills are paid online, we shop online, and the use of cash is becoming outdated. But the concept of envelope budgeting can still be used in conjunction with internet banking, it just takes a bit of planning and a few minutes each day to keep on top of your budget.
One option is to run separate bank accounts for each of your ‘envelopes’. With the use of internet banking you can easily move money around and see your balance. But running a lot of accounts is not ideal when you need a card for each.
A different option is to use a virtual envelope system. This involves using envelopes as before but instead of putting actual cash into each one you write on it to record the payments out, the money paid allocated, and the current balance. By spending a couple of minutes each day to update your envelopes you can keep on top of the budget and you will know when the fund for an envelope has been exhausted or needs topping up from another. You can also replace the envelopes with a simple printable list to keep track of your ‘envelope budget’.