Welcome to the first What is post! I am starting this series to really get to one of the main reasons why I started The Type A Babe: helping with personal finances! This series will be a way for you to learn about a variety of different finance concepts as if you were learning from your friend!
Does it seem like there are 300 different types of budgets out there? I know when I was looking to first create a budget when I graduated from undergrad, I was totally overwhelmed. One system that I frequently saw was envelope budgeting, which confused me because who uses cash?
But, after looking into it more, it is actually a really great way to budget for both budgeting beginners or advanced budgeters. So, I compiled how to go about setting up an envelope budget.
1.Determine Categories for Envelopes
The first step to setting up an envelope budget is to determine what categories you are going to create envelopes for. Generally, envelopes should be used for things that you purchase frequently or could bust you budget. Common categories are things like groceries, eating out, gas, and entertainment.
It’s important to really think when setting these up which ones are important to you. For example, going out and grabbing drinks or dinner with friends is a priority to me. So, I would make sure to have an envelope for this to ensure that I stick within my budget for the month for this category.
According to Dave Ramesy, here are some categories to consider:
- Groceries
- Restaurants
- Gas
- Health
- Haircare/makeup
- Car maintenance
- Personal
- Entertainment
- Gifts
2. Determine Budget Amounts
It wouldn’t be budgeting without the budget part! So, now that you have determined what envelopes you want to have, now it’s time to determine what your budget will be for each. To do this, you will need to know your monthly income, fixed expenses, and how much you have left to spend each month.
This is also the time to look at any categories that generally are hard for you to stick to a budget with and come up with a plan for how to cut back on those expenses. The envelope system is a great way to get you to stick to this new plan!
3. Create Envelopes
Now is the fun part, creating the actual envelopes! For this you will need cash in the amounts that you determined in the previous step as well as some envelopes. You can use any envelopes that you have around the house, or you can order special envelopes like these specifically designed to help with this type of budgeting.
For each envelope, label them for each category and then put in the amount you budgeted for into each in cash. Also, include a piece of paper in the envelope where you can track the spending for each category as the month goes on. One pro to getting the kits is that they come with these sheets pre-formatted for you.
4. Spend Using the Envelopes
You are all done with setup! Now, it’s time to go out and live your life. As you go to spend in each of the categories you made the envelopes for, only use the cash from these envelopes. Once the cash is gone, you are done with that spending that you are done for the month.
An important thing to remember with this is to not borrow from other envelopes. It can be tempting, but really focus on sticking to the amounts you put into the envelopes.
This method is great because it really is a visual representation of your budget. It can be so easy to overspend if you just use credit cards or debit cards cause you can’t see the money changing hands.
And that’s overall what envelope budgeting is! There are many pros to this method, as it allows you to see your cash and helps to keep you accountable. But, as I always say, budgeting is personal, so this method may not work for you.
Do you use envelope budgeting? Let me know what you like about it in the comments!
