{"id":5580,"date":"2023-03-09T06:00:00","date_gmt":"2023-03-09T14:00:00","guid":{"rendered":"https:\/\/www.quicken.com\/blog\/?p=5580"},"modified":"2024-11-18T10:20:26","modified_gmt":"2024-11-18T18:20:26","slug":"envelope-budgeting","status":"publish","type":"post","link":"https:\/\/www.quicken.com\/blog\/envelope-budgeting\/","title":{"rendered":"Your Quick, Easy Guide to the Envelope Budgeting Method"},"content":{"rendered":"\n<p>In our current economic climate, there are plenty of factors to make us feel uneasy. Eggs are seemingly on the verge of replacing the gold standard, housing markets are cooling across the country, and record levels of inflation continue to affect Americans in their daily spending.<\/p>\n\n\n\n<p>If you\u2019re concerned about overspending, know that you\u2019re certainly not alone. The best way to safeguard your financial comings and goings is to create a budget, and today, we\u2019re going to take a look at the envelope budgeting method \u2014 read on to see if this approach is right for you!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is the <\/strong><strong>envelope budgeting method<\/strong><strong>?&nbsp;<\/strong><\/h2>\n\n\n\n<p>Before the dawn of the digital age, people often paid bills by setting aside cash for each of their expenses in spare stationery jackets, a.k.a. envelopes, labeled for each individual budget category. This was the birth of the traditional envelope budgeting system as we know it today.<\/p>\n\n\n\n<p>In this technique, the idea is to break down your monthly living expenses, savings, and debt repayments into categories and set aside the appropriate amount for each bucket \u2014 one envelope for the rent, another for the car payment, one for each credit card payment, one for savings goals, etc.&nbsp;<\/p>\n\n\n\n<p>Once the money is allocated, the goal is to <em>keep <\/em>it allocated. You don\u2019t want to take money from your rent envelope unless you\u2019re using it to pay the rent!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>The pain of paying<\/strong><\/h2>\n\n\n\n<p>One of the reasons this old-fashioined system still works (and works well) is because of the \u201cpain of paying.\u201d Have you ever bought something and felt\u2026 okay, let\u2019s face it\u2026 <em>bad<\/em>? Whether we\u2019re talking immediate buyer\u2019s remorse or the angst of paying 25.5% APR on a maxed credit card, this feeling is all too real!<\/p>\n\n\n\n<p>In 1996 while writing his dissertation at Carnegie Mellon University, behavioral economist Ofer Zellermayer coined the term \u201c<a href=\"https:\/\/en.wikipedia.org\/wiki\/Pain_of_paying\">the pain of paying<\/a>.\u201d The concept is pretty simple \u2014 the more displeasure we feel at the register when we buy something, the less likely we are to buy it (or buy it again). The experience, he explains, doesn&#8217;t feel like we\u2019re acquiring something to better our lives, but more like we\u2019re losing money.&nbsp;<\/p>\n\n\n\n<p>Even more intriguing, Zellermayer discovered that paying with cash was <em>more<\/em> painful than by card or electronically. Since the concept\u2019s introduction, it\u2019s been used to help individuals curb spending due to the negative reinforcement associated with loss.<\/p>\n\n\n\n<p>So, what does this have to do with the envelope budgeting system? It goes hand-in-hand with the methodology \u2014 if you try to take money from one cash envelope to pay for something else, you\u2019re setting yourself up to experience the pain of paying!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Advantages of envelope budgeting<\/strong><\/h2>\n\n\n\n<p>As with any budgeting system, there are definitely advantages. Here\u2019s a look at several benefits that the envelope budgeting system provides:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The barrier to overspending is higher, making it more avoidable<\/li>\n\n\n\n<li>It\u2019s visually clear how much money is earmarked by the amount of cash in separate envelopes<\/li>\n\n\n\n<li>You can combine this budget system with others, like zero-based budgeting or a 50-30-20 budget, just by labeling the envelopes accordingly<\/li>\n\n\n\n<li>It\u2019s completely customizable, giving you as much freedom as you want<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Disadvantages of envelope budgeting<\/strong><\/h2>\n\n\n\n<p>It\u2019s important to remember that all budgeting methods aren\u2019t created equal. What works for a doctor in Long Island might not be the best approach for a recent grad in Louisiana. When it comes to the envelope budgeting system, here are a few drawbacks:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>It\u2019s inconvenient (and inadvisable) to be dealing with so much physical money<\/li>\n\n\n\n<li>It\u2019s time-consuming to set up your budget manually each month<\/li>\n\n\n\n<li>The system doesn\u2019t work well for monthly expenses that are estimated or variable<\/li>\n\n\n\n<li>There aren\u2019t any guidelines for how much money should go toward expenses (or even which expenses to include)<\/li>\n\n\n\n<li>You probably won\u2019t have enough cash on hand to fill all the envelopes at the start of the month, so you\u2019ll have to figure out which envelopes to fill when<\/li>\n\n\n\n<li>There are no prescribed savings or investment goals<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>How <\/strong><strong>virtual envelopes<\/strong><strong> improved the <\/strong><strong>envelope budgeting system<\/strong><\/h2>\n\n\n\n<p>Why use virtual envelopes instead of tangible ones? For one thing, we strongly urge our readers to <em>avoid<\/em> keeping large sums of cash in envelopes around the house. It\u2019s a bad idea to keep that much cash on-hand \u2014 you don\u2019t want to misplace that rent amount or have your dog chew up your BMW payment.&nbsp;<\/p>\n\n\n\n<p>Even though the cash envelope system is based on traditional budgeting, you can still apply its concepts and central tenets to the digital age. How, you might ask? It\u2019s simple \u2014 you can allocate the money in your checking account to virtual envelopes, which you\u2019ll then use to categorize your monthly spending.&nbsp;<\/p>\n\n\n\n<p>Although you can set these virtual envelopes up in a spreadsheet, there\u2019s nothing \u201ctying\u201d those envelopes to your bank account \u2014 if you spend money, it doesn\u2019t look like you\u2019re taking those funds out of your envelopes. So using a spreadsheet doesn\u2019t trigger the \u201cpain of paying\u201d to help you keep your budget on track.<\/p>\n\n\n\n<p>Instead, you can use a money management app like Simplifi to manage and track your virtual envelopes. With the ability to set spending goals and create categories for each expense, the app makes creating digital envelopes a breeze. You can even set up alerts to notify you as you approach your spending limits and easily see where your money is going.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>How to start an envelope system budget<\/strong><\/h2>\n\n\n\n<p>Allocating your money to designated categories can keep you on track to avoid overspending while making sure your bills get paid. Want to give it a try? Here\u2019s how:<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>1. Figure out your <\/strong><strong>monthly income<\/strong><\/h2>\n\n\n\n<p>Start by determining how much you\u2019re bringing in each month \u2014 after taxes. You\u2019ll want to use your net pay because that\u2019s how much you\u2019re going to have for your actual spending.&nbsp;<\/p>\n\n\n\n<p>If you get weekly or biweekly paychecks, this should be pretty simple \u2014 take a look at your bank statement and multiply the amount deposited in your bank account by 4 for weekly or 2 for biweekly. You\u2019ll actually end up with a couple of \u201cextra\u201d paychecks over the course of the year, but that\u2019s a good problem to have.<\/p>\n\n\n\n<p>If your income changes month to month, try to make your best estimate of your income for each of the last 3 months and average them \u2014 and remember to stay consistent. If you had an unexpectedly high income for one month, make sure not to base your budget around it!<\/p>\n\n\n\n<p>Once you determine your monthly income, you can start on the next step.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>2. List your <\/strong><strong>monthly expenses<\/strong><strong> to create <\/strong><strong>envelope categories<\/strong><\/h2>\n\n\n\n<p>Everyone\u2019s situation is different, so you\u2019ll need to do some work to figure out where you need to spend your money each month. Remember, if you\u2019re using a budgeting app, it should automatically create these buckets for you, so you\u2019ll just need to go in and make sure everything is in order and add any missing categories.<\/p>\n\n\n\n<p>If you\u2019re creating your digital envelopes manually, you\u2019ll need to track your spending categories in a spreadsheet. Try starting with these:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Housing, like your rent or mortgage<\/li>\n\n\n\n<li>Car payments, maintenance &amp; insurance<\/li>\n\n\n\n<li>Other travel expenses<\/li>\n\n\n\n<li>Food and groceries, including take-out<\/li>\n\n\n\n<li>Utility bills (electricity, water, gas, internet, cell phone)<\/li>\n\n\n\n<li>Health insurance &amp; other medical costs<\/li>\n\n\n\n<li>Entertainment &amp; social events<\/li>\n\n\n\n<li>Credit card payments<\/li>\n\n\n\n<li>Retirement savings &amp; emergency fund<\/li>\n<\/ul>\n\n\n\n<p>Remember, <a href=\"https:\/\/www.quicken.com\/blog\/monthly-expenses\/\">average expenses<\/a> can differ from person to person \u2014 so start with your monthly income and be sure to cover fixed expenses, like rent or car payments.&nbsp;<\/p>\n\n\n\n<p>Then, determine the variable expense categories where you want to place your remaining income, like a personal entertainment budget or contributions to an investment or savings account. This is especially useful if you have money left over at the end of the month.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>3. Adjust and adapt<\/strong><\/h2>\n\n\n\n<p>Remember, your budget isn\u2019t likely to be perfect right from the jump. It can take a few months to lock in a budget that works for you! And that\u2019s okay \u2014 just keep monitoring your expenses and adjust when you need to.&nbsp;<\/p>\n\n\n\n<p>If your variable bills, like the utility or grocery envelope, start going over (or if you don\u2019t set enough aside on the 1st of the month), you can dip into categories like your entertainment or clothing budget to offset the cost. If you have money left over each month, you can add it to an appropriate envelope, such as your savings.<\/p>\n\n\n\n<p>The idea is just to stay consistent. Once you figure out the rhythm and flow of your budget, you\u2019ll get the nuances of your expenses dialed in and have an easier time setting aside the appropriate amount for each of your digital envelopes next month.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>4. Stick to it<\/strong><\/h2>\n\n\n\n<p>There is one universal rule that applies to all budgets \u2014 they don\u2019t work if you don\u2019t stick to them! This very much applies to the envelope-based system. If you\u2019re battling overspending and feeling like your money just doesn\u2019t stretch as far as it used to, then sticking to your budget is the best way to make your money work for you.&nbsp;<\/p>\n\n\n\n<p>By adhering to your budget, creating adjustments when needed, and making a concerted effort to stay on top of your personal finances, you can manifest better spending habits, reduce your overspending, and ultimately, continue the journey to reach your financial goals.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Sick of inflation? Think eggs are about to replace the gold standard? Take control of your finances with this quick guide to the envelope budgeting method.<\/p>\n","protected":false},"author":59,"featured_media":5582,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_seopress_robots_primary_cat":"108","_seopress_titles_title":"Fast, Easy Guide to the Envelope Budgeting Method | Quicken","_seopress_titles_desc":"Sick of inflation? Think eggs are about to replace the gold standard? Take control of your finances with this quick guide to the envelope budgeting method.","_seopress_robots_index":"","inline_featured_image":false,"footnotes":""},"categories":[108],"tags":[],"class_list":["post-5580","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-budgeting-savings"],"acf":[],"jetpack_featured_media_url":"https:\/\/www.quicken.com\/blog\/wp-content\/uploads\/2023\/03\/woman-walking-past-apparel-store-window.jpg","_links":{"self":[{"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/posts\/5580","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/users\/59"}],"replies":[{"embeddable":true,"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/comments?post=5580"}],"version-history":[{"count":8,"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/posts\/5580\/revisions"}],"predecessor-version":[{"id":5653,"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/posts\/5580\/revisions\/5653"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/media\/5582"}],"wp:attachment":[{"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/media?parent=5580"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/categories?post=5580"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.quicken.com\/blog\/wp-json\/wp\/v2\/tags?post=5580"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}