Are you sick of overspending, no matter what system you seem to try? What if I told you that I had a super simple system that would guarantee you couldn't overspend, and you could get up and running within an hour? Enter envelope budgeting.
What is envelope budgeting?
Envelope budgeting is the simplest most powerful way to manage your cash flow. When most people talk about budgeting they’re really referring to cash flow - how your money goes in and out of your life on a day-to-day basis. Getting your cash flow right will mean that you can finally break the paycheck to paycheck cycle and actually get ahead - pay down debt, save more - all those things you know you need to do but can’t quite figure out how to do.
Envelope budgeting is an old system, one that your grandparents probably used and your parents might have tried. So, what is it, exactly?
In its simplest form, envelope budgeting is when you take your money in cash, sit down at your kitchen table with a stack of envelopes with the names of your expenses on them - mortgage, groceries, student loan, vacation (or: taxes, software subscriptions, web designer, PayPal fees; you can use this for your business as well!) and put money into the envelopes until the money is gone. Then when you go out into the world to spend, you use the money in the envelopes. Then, when you get more money, you put it into these same envelopes again. Rinse and repeat.
What’s so powerful about that? Doing it this way means that you always know how much you have available to spend on a certain thing. You always know *exactly* how much you can spend on something. No more pulling the credit card out and then choking when you get the bill. It also means that you don’t have a nebulous amount of money sitting around (in your bank account, on your kitchen table) that is unassigned and therefore “available” in your mind.
It’s the sort of simple system that seems too simple to work, and yet many thousands of people have used it and still use it to manage their money to pay off debt, save more, and finally feel ease around their money.
Wait, so I have to use cash for everything? No, though it can be very powerful to use actual cash even for a short period of time or for specific areas of your budget. It can be difficult in today's era of pay-everything-online-automatically, but it can be done. Especially for things like groceries and eating out, those two black holes of everyone’s budget, which are still largely conducted in person. Using actual cash makes darn sure that you don’t overspend. This allows you to put a hard wall around an area of your budget.
There are also digital tools that mimic envelope budgeting. There are a handful of tools out there that do this, but the two most popular are You Need a Budget (YNAB) and Every Dollar by Dave Ramsey. I won’t even pretend to be unbiased here, I am a YNAB evangelist. I’ve been using it myself for a decade and use it with all of my clients. I recommend it because I use it (and if you use this link, you can get a 34-day free trial PLUS an extra month free) and I’ve seen it work for myself as well as for client after client after client. Every Dollar also works in a similar way (bonus: the basic version is free), though it doesn’t do as strong a job of making sure that you’re not budgeting money you don’t yet have (the envelope budgeting equivalent of going to the grocery store and finding out your envelope is full of Monopoly money).
Another way of doing this without using real hard cash is to have a number of bank accounts that act as categories. This can get very complicated and involve a lot of transfers (and possibly, overdraft fees), but if you’re diligent it can be just as effective. For the long term, however, I recommend something like YNAB.
What about you - have you ever tried using the envelope method of budgeting? How about using cash-only? Tell me in the comments!