Once you have setup your first 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’ll typically use an envelope or a physical folder to store and organize your money. The most ironic part is that I was using this method long before I even knew it was a recognized budgeting concept. It wasn’t until I read about it one day that I realized it was an established practice 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You will want to keep money for certain items in your bank ( mainly those fixed items that are withdrawn on a monthly basis) and withdraw the rest.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’ll appreciate its simplicity. You’ll avoid overspending on specific items and prevent situations where you run out of money for other expenses. Each category has its own designated amount and space, eliminating the risk of one budget category encroaching on another (for example, using gas money to pay for dining out).
Ever since I set up my Excel budget and adopted envelope budgeting to organize it physically, my finances have improved dramatically. Even though my income has remained the same, managing and saving money has become much easier. It feels like I’ve discovered a new source of income. Effective budgeting and organization are key to financial success.
If you don’t like paying by cash and prefer to use debt or credit instead, then this whole concept of ‘Envelope Budgeting’ may not apply, or at least not physically. This is not to suggest it is not doable by keeping your money in the bank, but it will be a bit different, unless your bank allows you to categorize money into different accounts or categories. Otherwise, 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? Well some do, but it is limited and considering you need 5 or more categories (envelopes) it may not be enough.
Remember the saying ‘if you fail to plan, you plan to fail,’ so get going and start budgeting your money. It is a simple and low tech way to organize your way and get the most out of it.