Budget Technique #99: The Envelope MethodWant an easy way to consistently stay on track with your monthly budget?

All you need is a few envelopes and a little organized commitment.

Here's how:

Step One: Determine Your Budget

This is arguably the most involved part of setting up the Envelope Method for budgeting - you need a budget to start out with! By first Keeping Track of Your Expenses, you can see where you spend your money each month, and from there you can set your desired (and realistic) budget amounts.

Step Two: Get an Envelope per Budget Category

For each budget category (ie: Housing, Food, Entertainment), create a separate envelope and write the category's name on it. It's also handy to write your monthly budget allotment for each category on the envelope.

Step Three: Fill the Envelopes

This budget method is largely predicated on using cash, as it's the easiest way to manage your spending with this budget technique. At the beginning of each budget month, withdraw your monthly cash allotment and fill each envelope with its designated amount of money.

Variation #1: Only Use Envelopes for Variable Expenses

Your regular unchanging monthly expenses don't necessarily need to have envelopes, especially since larger expenses like rent, utilities, and debt payments are often paid by cheque or electronically. This budget technique is mainly to manage your variable monthly expenses.

Step Four: Go Forth and Spend

Each time you spend money, make sure you pull it from the appropriate envelope. You can keep a running tally of the remainder of money in each envelope by recording the expenditure and adjusted balance on the envelope itself, so at a glance you can see what you have left to spend.

Step Five: Adjust as Necessary

Budgets are fluid entities. Some months you spend less on entertainment, for example, and some months you spend more. Let's say this month you've been invited out to dinner with friends and you're hard-pressed to say no, but you also don't have enough money left in the "entertainment" or "eating out" or "food" envelope (depending on how you've labeled it) to cover the anticipated cost.

Take a look at your other envelope balances and see where you can make adjustments. Although your "entertainment" expense might go over the budgeted amount this month, maybe you can save money in the "groceries" category (since you're eating out anyway). So take the amount of money you need from the other envelope, recording the expense accordingly.

This isn't cheating, since you still have only a total fixed monthly amount of money to work with. Instead, you're reducing your expenses in one category to satisfy your wants/needs in another category. This is the principle of "finding money".

And if you simply can't find the money for that dinner from another envelope, then it's time to seriously reconsider whether going to dinner is realistic. Or maybe you can adjust the amount you plan to spend, possibly by not drinking, or by only ordering an appetizer.

Managing your money is all about the choices you make in life, and using the Envelope Method for budgeting can help you stay on track with your monthly spending by making conscious choices about how and where you spend your money. And you'll never break the budget as long as you stick to the money you've put in those envelopes!


Find the Power in Tracking Your Expenses

Setting Financial Goals You Will Achieve

Do You Really Need It? 8 Expenses You Can Cut Out of Your Life

Nora Dunn CareOne Life Balance BloggerNora Dunn

Nora Dunn is The Professional Hobo: a full-time traveler and freelance writer. She is a contributing writer under the CareOne Debt Relief Services Life Balance blog. Having sold her business and belongings to travel, she has been on the road since 2007. She travels in a financially sustainable manner, taking advantage of creative volunteering positions. As a former certified Financial Planner, she is financially responsible for her actions along the way. She believes there is a fine balance between planning for tomorrow, and living for today. Compensated Blogger for CareOne Debt Relief Services. You can follow Nora on Twitter @hobonora

To follow CareOne click here!