What is and how to set up ‘Envelope Budgeting’

Once you have setup your budget, the next step is to physically organize your money. That is, where you will keep it and allocate it to different items in your budget.

We call it ‘Envelope Budgeting’ because you will normally use an envelope or some sort of a folder to store your money and organize it. The most ironic thing about this concept is that I was using it long before I knew it existed, until I read about it one day and realized that it actually exists as a concept in budgeting.

You will want to keep money for certain items in your bank ( mainly those fixed items that are withdrawn on a monthly basis) and withdraw the rest.

Once you have all your money in the envelope, start allocating it to different items in your budget. Use a large tag to label each item and enclose the money within the tag. Of course, the money you allocate to each item is already specified in your budget that you would have created here.

From here on, when you need money for grocery shopping, you take it from the money allocated for it in your envelope. The same for gas purchases and so on.

Once you get comfortable with this type of budget arrangement, you will appreciate the ease and the fact that you will never have to overspend on certain items and have no money left for others. Each item now has its own allotment and room, and there is no more risk of one jumping into the territory of the other (using gas money for example, to pay for dinning out)

Ever since I set up my Excel sheet budget and this envelope budgeting to help organize it physically, my finances have changed tremendously for the better. Although I generally still make the same money, it has become so much easier to spend and save. It is as if I have found or added a new source of income. It is all about budgeting and organizing your money.

If you don’t like paying by cash and prefer to use debt instead, then this whole concept of ‘Envelope Budgeting’ will no longer apply. This is not to suggest it is not doable by keeping your money in the bank, but it will be harder. Think about it: all the money will be pooled together and it will just be harder to separate than if you were to do it in an envelope with each having its own room and tag. Wouldn’t it be nice if banks introduced some form of ‘Envelope Budgeting’ too?

Remember the saying ‘if you fail to plan, you plan to fail,’ so get going and start budgeting your money.