Part of our Healthy Finance Series:

Envelope Budgeting for Financial Health

Envelope budgeting has been around for a very long time.

Even if you've never used it personally, you probably recall your mother - or even your grandmother - tucking cash away in individual envelopes each payday.

Unfortunately, in today's mostly cashless society, envelope budgeting is simply not as effective as it once was. However, with some planning, it can still be used to assist you in keeping to your personal budget.

Let's begin with Envelope Budgeting 101. The concept is easy - you take a stack of envelopes and write a spending category on the front of each one. They might look something like this:

1. Mortgage/Rent
2. Utilities
3. Gas
4. Groceries
6. Entertainment

You may have more categories - it's your budget, so you get to label them however you want.

Once you've separated your finances by expense type, you figure out how much you are allowed to spend in each, and you put the corresponding dollar amount in the correct envelope.

If you go to the movies, you pay for it out of the entertainment envelope. When you run out of entertainment money; you're done until the next month, when you get to fill up the envelope again. It's a nice system and definitely helped many a family stick to a fixed spending limit.

If you're comfortable carrying cash around with you, it can still work exactly as outlined; however, if you're like most people and rarely even have a dollar bill on you, it's time to revamp the envelope budget. This can be done in a couple of different ways.

You can create a spreadsheet, or chart, with each of your expense categories in a separate column, and beneath it the total dollar amount you're budgeting for the month. When you pay your rent, deduct that from the rent column. When you go out to dinner, save the receipt, and deduct that from the entertainment column. If you're religious about saving receipts and recording your expenditures when you make them, this system will work quite well. When you've used all your allocated funds in one area, you are out of funds until the following month.

Another option is a mixture of the two. You can use the chart/spreadsheet for fixed payments, such as your mortgage, and other normal house expenses, such as utilities. Then you can use the envelopes for entertainment, groceries, gas, etc.

There are benefits to this mixed approach because where most people fail on their budget isn't with fixed expenses, but the fun ones, like buying clothes or going out to dinner. By having the cash already set aside, when it's spent, you have an empty envelope, and you can't get much more of a visual reminder that you're out of cash!

With some tweaking, and self-control, envelope budgeting can still be an effective tool in managing your money. Regardless of what type of budget you use, be sure to be honest about your income and expenses so you don't end up in the red at the end of the month.





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