I honestly don’t remember how I started using an envelope to budget. I’m sure I read an article somewhere that made sense at the time. But over the years I’ve found that it’s an easy and flexible way to keep track of what you’re spending. Plus, once you get it set up, it pretty much takes care of itself.
Simple
Everything we spend goes on the envelope. On the front I have areas for variable expenses (those that differ month to month that we control, like groceries or eating out).
On the back is the goal for the month, along with space for a running balance of our “miscellaneous” money. Inside the envelope are any receipts from purchases throughout the month.
Note — this is different from people using several envelopes filled with cash. That system is a forced spending regime. You load the envelope at the beginning of the month and hope/plan for it to last.
My system uses an envelope because it’s a convenient way to write down what we’ve spent and a place to keep the receipts for what we’ve written down. Then we save these envelopes until the end of the year, when we either use the receipts for tax purposes or shred them.
Are you on track?
Keeping an eye on what you’re spending is a great first step. But like Goldilocks, you have to know if what you’re spending is too much, too little, or just right. While you can aim at preset percentages (like the recently popular 50/30/20 plan), I find that a budget that actually reflects your life is much more effective.
- You have to live. If you’ve read my other posts, you know one of the first things you do to find out what you’re spending is…to spend. Not overspend, not go crazy. But see how much the gas bill is each month, see what you’re spending for groceries in a normal month, how much you spend going out. Don’t starve yourself, but also don’t give into every whim. You want this to be a true test. I suggest you write down everything for a minimum of three months. Obviously, if at the end of the first month you’re looking at huge credit card bills and little income, it’s time to rethink your spending (and earning) plans.
- After several months, you should start to see patterns. Most budgets have a lot of fixed or normal costs and a few completely variable. For instance, when you’ve gone through a couple of seasons of electricity bills, you will have an idea of what the bill should be and can figure out a monthly average.
- Calculate those averages. If it’s July in the South, your electric bill is going to be higher than it will be in December. However, you can still average out for the year even if you’re only a few months in, and then tweak things once you have a year’s worth of bills. Just add the three or four months you’ve been tracking together and divide by that number. For instance, if your electric bills are $104.95, $139.02, and $177.57, adding those together will give you $421.54. Divide by three and your first estimate of your monthly electric bill is $140.51. If you’ve been in the same house for a year or more, you’re already ahead – just compile the last year of bills, divide by 12 and use that as a guideline.
- Think about this for a minute. What’s going to happen during the year? You’re going to have some months that are lower than your monthly average, others that are higher. It’s okay to be off on your estimates, especially during the first year, as long as you have money to cover it. (If AC Is putting you in the poorhouse, turn it off and use fans). The goal is to get the budgeted number as close to what you’re actually spending as possible.
Let’s say you’ve budgeted $125 for electricity every month. Your first month, it’s $150 because it was a hot May. Do you throw up your hands and give up? No. Because in the winter, it should be lower. You simply subtract $25 
($125-$150) from the budgeted amount and keep a running tally that should even out over the course of the year. Similarly, if you heat with natural gas, the bill in May should be lower than your monthly average. That doesn’t mean you have free money. You have to add any extra back into the amount so when January rolls around you have money in the budget to cover it.
- When you have a budget – either after three months or better yet after a full year – then compare it to percentages you can find on the web. For instance, most financial gurus suggest you spend no more than 28% on housing. Just remember to take percentages with a grain of salt. In some areas, 28% will get you a castle; in others, a studio apartment. Look in your area to see what the average spend is for housing and weigh that into your decision. Do the same with all your budget items, comparing national stats to local information.
- Sometimes you’re going to find crazy numbers, both low and high. I read recently that the average family of four spends $1,000 per month on groceries. We spend half that on groceries. Yet our insurance rates are higher because we live in a largely one-party state (no oversite) in a large city.
- Once you know where your money is going, think about what else you want to do with it. Saving up a year’s salary in case you lose your job would be a good place to start. Vacations or upcoming major purchases can also be budgeted for. We went to Europe over the summer. This wasn’t a spur of the moment vacation, and we made sure we had the money before we left. Similarly, we know that a car purchase is in the near future and have allocated some of the budget for that expense.
- Investing should be included in your budget too. Actually, you may want money for investing to be pulled automatically from your paycheck before you have a chance to spend it on something else. First, consider investing through your work retirement plan so it comes out before taxes. Then if you want to invest on your own, look at having a set amount withdrawn from your check and put into your brokerage account. If you don’t see if, you probably will be less apt to spend it.
- Compare the percentages you’ve discovered with what you’re actually spending to see where you might free up some money to pay for that dream trip or so you can invest more. Are you spending too much in certain areas? Don’t try to chop everything down at once – take a couple of categories and get them under control, then move on to others.
When do you have to update this?
I look at our envelope when the numbers get out of whack. If we run a negative for a few months (meaning we’re overspending), I’ll first look at the bills to see why. When gas went to $4 a gallon several years ago, our carefully constructed car gas amount was blown out of the water. We looked at carpooling and transit, but eventually were forced to increase that line item to match what had happened with gas prices.
Similarly, if there’s a positive of more than $200 over the course of the year, I’ll adjust it down. So when gas went back to around $2-$3 per gallon, we suddenly had a lot left over at the end of the month and the year. This was not free money; we didn’t go on a spending spree.
For big ticket items – like insurance or your mortgage – it’s a good idea to check every couple of years or when a major event happens. When my child turned 16, our car insurance skyrocketed. I checked around and found another company that was hundreds of dollars less. I’ll probably be checking again when my second child hits 16, just to make sure I’m not overpaying.
Obviously, you have to update your budget when your life changes. This can include buying a new car (because you have car payments and different gas mileage), changing jobs, moving, or any number of things. However, barring major changes, the positive of a budget is it can run on its own. You probably won’t suddenly turn up the AC or start buying more expensive groceries. Once you have it set the adjustments should be minor.
No system is right for everyone
You may think that writing down numbers and saving receipts is very 1997. And I can understand that. But every budgeting app I’ve checked requires at minimum an account, and most want to have all of your banking and bills linked to the app. For privacy purposes, I’m unwilling to do that. I’m happy to work with paper, but you might want everything at your fingertips. Make sure you think about the privacy issues before signing on.
Freedom of budgeting
Okay, stop laughing. I actually wrote that. If you go into budgeting with an open mind, you may discover what I’ve discovered over the last several years. Keeping track of my money gives me a sense of peace and freedom from worrying about money. No, I don’t have as much as I would like. Yes, high bills still tick me off. But when the car needs tires or the first tuition payment comes due, I know that as painful as writing that check is, we have the money. And when we decide to go to Disney or Europe or just to the beach for a weekend, I know that I can relax and enjoy my vacation. Aren’t a few hours of headaches setting up a budget worth that?
Photo of jar with coins by Josh Appel