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Budgeting Tips: The Envelope Method

Budgeting Tips: The Envelope Method
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When it comes to budgeting, there are several methods you can try. The important thing is finding the one that works best for you. Some people like to use an app, while others prefer to use a simple spreadsheet, tracking their monthly expenses. One method you may not be familiar with is the envelope method. 

The money saving expert, Martin Lewis, has previously raved about this budgeting technique, as have other budgeting gurus. Perhaps one of the reasons this method is so popular is that it’s so easy to follow, and you can clearly see how much money you’ve got left for each section of your expenditure. So you won’t accidentally spend your rent money on your grocery shop!

The issue is that it can take a little bit of organisation to set this up, but it really can be a great way to budget moving forward. We’ve explored the envelope method of budgeting in more detail below:

1. Calculate Your Budget

Before you can set up the envelopes themselves, you need to balance your budget. This involves sitting down and working out all your expenses, from big bills to petty cash you might use to buy your lunch at work. You need to take into account what you earn each month (or week) and compare this figure to how much you spend. If necessary, you may need to cut costs to make these two figures balance. 

It’s essential that you thoroughly consider your budget, as none of the budgeting tips you might employ will work unless you have a solid understanding of your income and expenses. If you don’t know how much is coming in or going out, there’s no possible way that you can improve your spending habits. And as an added benefit, you’ll get a better understanding of your spending habits, particularly areas in which you need to cut back.

2. Choose Your Categories

Once you’ve calculated your overall spending, you can start to break these costs down into categories. These could include things like:

  • Rent or mortgage payments
  • Utility bills
  • Other priority bills
  • Groceries
  • Shopping 
  • Entertainment
  • Travel
  • Savings

If you’re self-employed, you may also need to have a category for tax. You can have as many categories as you like, just bear in mind that each one will need its own envelope, so too many could get complicated.

3. Split Your Budget

The next step is to split your income into the different categories, or envelopes. This should be fairly straightforward, especially after completing the first step of calculating your budget. Some of these will be easy – you’ll know how much to allocate towards your housing expenses each month. Costs that fluctuate, such as your gas, electric, and water bills, may be a bit more tricky.

It’s good practice to slightly overestimate the amount you allocate towards your bills and other essentials, so that you won’t be left short. And with the cost of living on the rise, you’ll probably need to put even more towards these expenses. 

Big, one-off or annual expenses, like your MOT or buying Christmas presents, should be factored in at this stage too. You could either regularly update your spending allowance to cover these costs, or have a separate envelope for these types of expenses.

4. Set Up Your Envelopes

After the preparation stages above, it’s time to create your individual envelopes, and put money in them! Each category you’ve chosen will need a separate envelope, which should be clearly labelled and stored in a safe place. Every time you get paid, you’ll need to separate your wages into these envelopes. When spending the money, you’ll also have to ensure you take the amount from the right envelope, or you’ll get yourself rather muddled.

This may not be the most high tech system, but people do find the envelope method of budgeting effective. It requires a bit of setup, but once you get going, envelope budgeting is easy to stick to. It may not be the right method for everyone, but you might want to give it a shot!

Should I Use the Envelope Method?

If you’ve struggled to stick to other budgeting methods, it’s probably worth trying the envelope method. That way, you can easily see how much money is allocated to each category, such as food, rent, utilities, subscriptions and leisure. If you properly stick to this technique, you should never overspend, or find yourself short in terms of your priority expenses.

You may, however, not want to use real envelopes for your budget, especially as it’s becoming increasingly common to make contactless bank card payments. As a society, we rarely use cash anymore. If this is the case, you may want to consider using a service like Monzo. Monzo ‘Pots’ are essentially the same idea, these are just within your bank account rather than physical envelopes.

Overall, the budgeting method you use doesn’t really matter. The main thing is that you manage your money properly, and at least cover your main costs. Hopefully you’ll also be able to put a little money aside each month, so that you can save up for larger expenses, but that might not be possible every month. Just have a goal in mind, to motivate yourself to cut back your costs, whether it’s a holiday or a new car!

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