To use the envelope budgeting method first grab a piece of paper, a pen, and all your bills for a given month. Then calculate the total cost of all of your bills. You will want to include all forms of insurance, car loans, housing, utilities, cable, internet, phone providers, medical bills, etc.
Next, figure out how much money you earn per month on average. After this has been determined, subtract your bills from the amount you earn. The left over money can be used to determine how much money you can allocate to groceries and gasoline.
Remember to leave some spare money for savings and discretionary spending if possible. Discretionary spending, money for buying things you would like but do not need, is optional. It should only come after having enough money for bills, necessities, and a good amount of savings. Roughly thirty percent of your take home paycheck is considered adequate savings (for more read the 60/40 budgeting solution article).
After you have determined how much money should be allocated to each budget category, get four envelopes and a pen. On the envelopes you will record the four categories of your budget; bills, groceries, gasoline, and discretionary spending. For example, on one envelope write "gasoline" on the outside of the envelope, repeat until you have an envelope for each budget category.
When you receive your first paycheck go to the bank and cash it. Looking at the amount you predetermined necessary for bills, groceries, and gasoline place the cash value into each budget envelope. If there is excess cash after filling each envelope place it into a savings account until you reach thirty percent of your monthly income. With your second paycheck finish filling your savings account until you reach the budgeted thirty percent. Any excess at this point can be placed into the "discretionary spending" budget envelope.
If there is not enough cash to fill the bill, groceries, and gasoline budget envelopes with the first paycheck use the second paycheck to finish filling them. Any excess from the second paycheck should be placed into a savings account until you reach the budgeted thirty percent. After that amount has been reserved, place the rest of the cash into the "discretionary spending" budget envelope.
This is the basic concept of the envelope budgeting method. This method is an excellent solution for those who spend excessively on credit cards or have trouble not spending their savings. This helps you to remember not spend more money than is within each envelope. It also provides a visual for exactly where that money needs to be spent and what is means if you spend it on discretionary items instead of the necessary. For example, if you spend your grocery money on a new game system you know you will not have any food for the entire month.
The point of the envelope budgeting method is to help you to spend more wisely. Another advantage of this budgeting method is to provide you with encouragement as you begin to follow the budget you created for yourself. This method should help you stay positive and consistent in your budgeting.
