I’m surprised by how many people that I interact with don’t know what the envelope budgeting system is. To me, it seems like such an easy way to create and keep a personal budget. My impression has been that everyone should understand this pretty easily. Impressions aren’t always correct. I’ve had to sit down more than once and carefully go over the concept only to be met with a puzzled look afterwards. In a large part that led me to write this post. I’ve also created a tutorial video as well.
What is The Envelope Budgeting System
For anyone not familiar with this concept, the envelope budgeting system is a way to allocate your money towards expenses you’ll know you will be incurring. The simplest way to describe envelope budgeting is to imagine a pile of cash in your hands (your income) and several envelopes on your desk in front of you. Each of the envelopes is labeled with a budget category. Utilities, Groceries, Clothes and Car payment are just a few of the categories that you might use. As you get your income, you divide it out and put a predetermined amount into each envelope. When you reach a time where a particular expense needs to be paid, you take it from that envelope and pay it. Simple enough, right?
Trying to explain the envelope budgeting system can be challenging, so I made a cheesy YouTube video that gives an overview on what envelope budgeting is. They say a picture is worth a thousand words so a video must be some multiple of that! Oh, and the music is pretty decent as well I hope that by putting this on a video I can show anyone that doesn’t understand the envelope budgeting system how to use in their own personal budget efforts.
The beauty of the envelope budgeting system is that you can budget for a variety of expenses. Monthly, quarterly or even yearly expense are easily accounted for with this system. Long term expenses can be especially challenging to budget for. The envelope budgeting system makes it simpler to periodically put funds away for these expenses. When they come due, you’ll have the money set aside to pay them.
I find this budgeting system a great aid in setting aside funds for upcoming expenses. I also use it for savings and to pay off debt. Another advantage is that if you chose too, you can set up your own monthly level billing plan. In my mind this is a lot better than giving the utilities a free loan. It’s a simple enough system, and one that works. But perhaps it’s a little too simple since I really don’t know of anybody that uses paper envelopes to do this. What really matters is the concept of setting aside money towards a particular upcoming expense.
The concept of the envelope budgeting system, I.E. the use of envelopes, is just that, a concept. It takes the basics of budgeting and lets you visualize, through the use of envelopes, how to set aside money for future expenses. That’s not to say that people do not use physical envelopes to sort and save money for future expenses, they do. But there are other ways, through the use of software to do this as well.
Technology and Envelope Budgeting
I have a long history of using the envelope budgeting system. I’ve used this method of budgeting for more years than I care to admit. Initially I used accounting ledgers (paper, do you believe that!) to keep track of my checkbook. The multiple columns in the ledger were perfect to create envelope categories. I eventually graduated to spreadsheets which added a lot more flexibility as well as the capability to add an unlimited amount of categories, or “envelopes”.
Eventually, I moved on to Quicken Deluxe to manage my checking. I use the “class” feature to create and track “envelopes”. I especially like this as I can pull individual reports for each of the “classes” to see what my spend rate has been. It also comes in useful when calculating how much I have to set aside each month for utilities. I simply look at the last years utilities expenses and divide it by twelve. I usually add a 10% buffer to that so I’ll have a little bit of wiggle room. The reporting feature makes this ideal for me.
For those of you that would like access to your envelope budget online and on your mobile Android or apple devices, there are many options available to do this. I did a quick search and immediately found two that allow you to manage your envelope budget on-line, or on your mobile devices. Mvelopes and Eebacanhelp both offer an online envelope budget service that allows you to create and manage your budget from just about anywhere. I plan on doing a review on one or both of them in the future.
If you’re interested in testing the waters by using a spreadsheet, you can also download a free excel spreadsheet from this mdmproofing. They’ve done a really great job with their envelope budgeting spreadsheet. The spreadsheet is setup so that you can use it as a check register. The key to this spreadsheet is that you can create as many or as little envelope categories as you need. Whenever you deposit, withdraw money or write a check, you allocate the transaction amongst the classes. The spreadsheet does all the math for you and let’s you see, at a glance, how much money you have in each envelope class. It’s as simple as you can make a spreadsheet. As an added bonus, it’s free!
I hope this post has been informative and helpful. I’ve been wanting to write this for a while now but got hung up on my envelope budgeting video! It wasn’t that complex to produce but took a lot of hours in getting all the objects and timings right. Searching for the right music took some time as well.
Do you use envelope budgeting to meet your financial goals? What tools are you using? If not, can you share your budgeting technique with us?
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