The envelope method offers a simple approach to managing your money so you’ll have enough for both your needs, wants, and even your long-term goals.
In this guide, we'll break down the process into 3 easy steps.
1. Set a schedule
Start by establishing a regular schedule for budgeting. Your budget period will determine how much money you need to put into your envelopes, so you’ll have enough to cover expenses.
Most people do their budgets every time they receive money. Employed individuals, for example, may do this when they get their salary – whether it’s bi-weekly or monthly.
2. Plan how to allocate the money
Identify spending categories and money goals where your income will go. You can follow the 50/30/20 strategy – 50% for needs, 30% for wants, 20% for savings – when allocating money.
- Budget for short-term spending
Always start with essentials, like rent or loan payments, utilities, groceries, and transportation costs.
If your budget allows it, you can allot money for wants such as dining out, entertainment, or shopping. This can help you enjoy occasional treats without going overboard and putting your finances at risk.
At times, you may need to move money around since some expenses are harder to predict than others. Just be careful not to go over your income.
- Set aside money for long-term goals
Think about your long-term financial goals and how much you need to save or invest each month (or each payday) to reach them. It helps to treat these goals as non-negotiables so you can make steady progress.
If you have unspent or leftover cash in your “needs” envelopes at the end of the budgeting period, it’s ideal to reallocate it to savings and investments. If this happens often, it could hint that you’re allocating too much for a certain need, and you may be able to assign the money to a goal instead.
3. Choose how to track your spending
Traditional envelope budgeting involves putting physical cash in real envelopes. Every time you need to spend, you’ll take a little bit of money out from an envelope until you’ve used everything up.
Some people decorate or color code their envelopes for easier tracking. Keep in mind that the traditional method involves withdrawing most, if not all, of your income to stuff into envelopes.
This might prove challenging for people who prefer cashless transactions for security and convenience.
If you’d like to go digital, you can still follow this method while taking advantage of technology that can make saving, investing, and budgeting safer and easier.
One way is to use a trusted banking app or digital wallet that allows you to set aside money in virtual envelopes.
You can also open multiple accounts from your existing bank and simply transfer money from one source to your different ‘envelope’ accounts.
Though you won’t be holding actual envelopes, you’ll still abide by the core principles: be mindful of your spending, prioritize your needs, stick to a budget, and remember to think long-term.
