How to Use the Envelope Budget
Need a super simple budgeting system? Try the envelope budget!
Budgets are not bad. They often have a negative connotation but are truly a wonderful tool for building wealth as a family.
Once you’ve shifted to a positive approach to budgeting, you’ll need to find the right budgeting system to help you achieve your goals.
We’re going to dive into a super simple budgeting system for those who are…
Just starting their financial journey
Wanting to get back control over their spending
Not sure where all their money is going
But first an important Public Service Announcement…
One Size Doesn’t Fit All
People often assume that there is one budget that will work for everyone.
Unfortunately, that is not the case.
There is no single, magic budget that will work for all families.
You may find one budget that will work better than another–depending on your stage of life, level of debt, personal habits, and spouse’s habits if you are married.
Your preferred budget could also evolve as you become more financially responsible. If you parent a young adult, you may want to share this article with them to enhance their financial readiness.
The envelope budget system is a great tool for new college grads, even high school students who are working part-time. Learning this simple tool is a great way for young people to get started on the right trajectory.
Now, before you start budgeting, it is important to revisit your values and goals. If you need to level up your goal-setting chops, read this article on goal-setting and come back.
Remember that budgeting is a process, and it always comes with tradeoffs.
If you value having a large house in a well-kept neighborhood for your growing family, you will likely have to compromise on entertainment costs.
Similarly, if your number one goal this year is to pay off debt, you may have to forgo vacations and dining out. Understanding your family values and goals is a prerequisite to budgeting.
There are two primary types of budgets: the envelope budget and the detailed budget. We handled the detailed budget in a separate article. Here, let’s focus on the envelope budget.
Using The Envelope Budget
An envelope budget is a foundational budget often suggested for new college grads. But it can also be helpful for parents who do not know where their money is going. This type of budget is perfect for those starting on a path to good money management.
The concept behind the envelope budget is simple: you cannot spend more than you earn.
Your net paycheck goes into a master envelope (think big manila folder) along with three smaller envelopes labeled NEEDS, SAVINGS, and WANTS.
1. NEEDS
In this first envelope, set aside enough money for fixed expenses that MUST get paid.
For instance, allocate…
Rent or mortgage payments;
Recurring auto or student loan debts;
Utilities;
Transportation costs;
Insurance;
And grocery expenses
…to this NEEDS envelope. Christian parents who tithe may want to consider charitable giving in this envelope as well. Aim for no more than 50% of your earnings to go in this NEEDS envelope.
2. SAVINGS
Next, set a savings goal and put that cash into this envelope.
It may be 10% of your net pay or a fixed dollar amount. Do not spend this SAVINGS envelope on any regular expenses under any circumstance – take this one right to the bank so you can earn interest.
It may not be a big dollar amount now, but you’ll be amazed at how fast your emergency fund or opportunity fund can grow over time.
No savings goal is too low. Build momentum and use pay increases to increase your savings rate.
If you are trying to quickly pay off high-interest credit card debt, it may be advantageous to pull money from this envelope after you have established a small emergency fund.
Focus on this SAVINGS envelope for principal payments above and beyond the required minimum credit card payment.
3. WANTS
This final WANTS envelope is designed to pay for all those other things you desire. Dining out, recreation, concerts, shows, and travel – you get the picture.
Once this envelope is empty, that’s it.
If you have to eat macaroni and cheese each night for a week, so be it. You are NOT allowed to pull from the other envelopes.
The SAVINGS envelope is for true, unforeseen emergencies such as job loss, or a broken appliance and is only there as a backup to cover your family’s absolute NEEDS.
Your family values and goals should influence the amount that goes into this WANTS envelope. I intentionally listed the NEEDS and SAVINGS envelopes before this WANTS envelope.
If you allocate to the WANTS envelope first, you may not have enough money left over to pay true needs or to fund your saving goals.
The Envelope Budget for Tech-Savvy People
Obviously, we are living in the technology age. The idea of only carrying cash may not be appealing. In theory, you can apply the envelope budget concept online.
I will say that you may find it more challenging.
Having the physical cash that runs out – if only for a month or two – can be the sobering reality you need to get on track if you are in debt or struggling to make ends meet.
If you do take this concept online, focus on automatic transfers and debit cards only. Do not introduce new credit card charges at this point, as they will only distract you.
Once You’ve Graduated From the Envelope Budget
At some point in time, you will master the envelope budget and “graduate” to a new level. Graduation occurs when you are earning enough to fund lifestyle needs and save at least ten percent of your income each month. You become interested in maximizing savings and tax efficiency. Then, it’s time to move on to the detailed budget.
Want to bust the big family finance myths that are keeping you trapped? Download the Starter Guide.