Tip of the Week
Consider the envelope method for budgeting, using cash placed in labeled envelopes for many of your monthly expenses.
Did you know the 50-30-20 method of budgeting isn’t the only budget in town? (Don’t get us wrong, we still love it.) But you may also want to know about the envelope method for budgeting. It substitutes cash—yes, real cash—for many of your monthly expenses. Here’s why you might consider it as an alternative: Actually seeing and handling cash can act as a brake on spending.
Read on and we’ll describe the envelope method in detail.
What is a budget?
An estimate of your income and expenses for the month or year, used to plan your financial life.
Tactics and considerations:
- When creating a budget of any kind, it’s important to know what your net incomeNet income is the money leftover in your paycheck after deductions, state and federal taxes have been taken out.
is. It’s important because it’s essentially what you have to live on each month.
- Next, tally your monthly expenses. You may need a pencil and paper to track everything, or a spreadsheet.
- Assign your spending categories. With the 50-30-20 budget, we use fixed expensesFixed expenses are the ones you must pay each month, such as rent or your student loans., variable expensesVariable expenses are monthly costs that are flexible. These can include what you pay for food, clothing, and entertainment. and savings to create three budget categories.
- The envelope method can help most with variable expenses, the ones that you can change from month to month.
- Consideration: You won’t pay ongoing fixed expenses such as cable, phone, and student loans with your envelope cash. Continue paying those bills online, by check, or by whatever your chosen method is. But you’ll have to account for those expenses in your total budget, and separate them from variable expenses, for which you’ll use cash.
How to use this method:
- Assign categories to your variable expenses. Categories could include things such as groceries, personal care items, entertainment, household expenses, and savings.
- Next, grab some envelopes, and write a category on each envelope.
- When you get paid, put a predetermined amount of money in each envelope.
- Before you go grocery shopping, or to the movies, or out to dinner with friends, take some cash from the corresponding envelope. What’s in each envelope is what you have to spend until the next time you get paid. And as you see the cash disappearing, you’re likely to get more careful about spending.
- You won’t be whipping out your credit card or debit card if there’s a shortfall. Actually, consider leaving your plastic at home!
Your total take-home pay each month is $2,000.
Fixed expenses: continue paying monthly fixed expenses as usual.
|Food & groceries||$300|
|Personal care items||$50|
- Grab five envelopes: label each with a variable expense (food & groceries, entertainment, household expenses, personal care items, and savings.)
- Assuming you get paid twice a month, input half of each expense with every paycheck. (If you spend $300 per month on groceries, each time you get paid, put $150 into your food envelope.)
- Once the money from the envelope is gone, you can’t spend more money on that category.
Over time, make adjustments to your categories to reflect how you live. For example, maybe you spend more on entertainment than you thought, and less on household expenses. Or maybe you find you have money left over in some categories. Feel free to put that into your savings envelope.
Find out more:
How to Save Money with the 50-30-20 Budget
It’s one of the most popular budgeting techniques out there, here’s a quick explainer about how to make this budget work for you. Don’t know the difference between a fixed and variable expense? We’ve got you covered.
How to Improve Your Credit Score
Your credit score is a key part of your financial life. It determines how much credit you can get, the interest rates you pay on your loans, and how much it might ultimately cost you to buy a house or a car. Here are some tips for improving these three very important numbers.