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Say hi to Dave. Dave is in his mid-20s and works at a startup. He earns enough to support himself and spends it wisely. He goes out only a few times a month and tries to save as much as he can on food and commute. He splurges once in a  while on things like new shoes and online scratch cards. He even keeps some money aside on payday.

But last week of every month, he finds himself in the same situation. He has no money left to make it to his next paycheck. He cuts down even more on food and tries to spend as little as he possibly can. But it’s just not enough. He ends up having to either borrow from a friend or withdraw the money back from his savings.

Do you relate to Dave? Most people do. If you too feel like you just don’t know how you face the same financial crisis every single month, then you should check out the envelope budgeting method.

envelope budgeting method is a simple, systematic way of paying your bills and saving money

The envelope budgeting method is a simple, systematic way of paying your bills and saving money

What’s the Envelope Budgeting Method?

The envelope budgeting method is a simple, systematic way of paying your bills and saving money. It’s a budgeting system that involves putting your cash into separate envelopes meant for different categories you’ll need to money for. Here’s how it works.

  1. Establish categories and limits

Your first step towards creating a budget that works for you is identifying where your money needs to go. If you know where you need to spend, only then can you decide how you want to spend. The best way to do this is to print out your previous months’ (3 months at least) bank statements. It’ll give you a clear idea of your spending. Use the bank statements to determine all the categories you’ll need to spend money on.

First, set aside the budget for absolute essentials like rent, groceries, automobile, guaranteed bills, and club fees. Next, set out the money you need to pay your taxes and debts if you have any. You then need to give priority to your savings, deciding how you much you want to and can save in a month. Finally, you can set aside money for entertainment, leisure, and shopping.

If you want to be really proactive about the way you spend every single buck, you can add true expenses in your budget as well. True expenses are expenses whose timing is uncertain but the occurrence is almost guaranteed. For example, repairing your car.

  1. Assign envelopes to every category

Now that you’ve accounted for all the categories, you need to assign categories for each of them. Get any size of envelopes that works for you and write the name of the categories on them. Plastic envelopes are a better choice when keeping in a purse or briefcase since the ones made of paper can tear easily. You can also use coupon holders or mini accordion folders.

Remember that the money that’ll be spent outside your home should have envelopes that are easy to carry in your wallet or purse.

  1. Divide your income

So it’s payday. This is when you need to start taking action. In order of the priorities, start putting cash in each of the envelopes. For expenses that’ll be spent all at once, like rent, mortgage, and payments, you can keep the envelopes empty, write a check and keep it there, or get rid of the envelopes altogether.

For incremental expenses like groceries and automobile, put the exact amount you budgeted into the envelopes. A good tip is to write the available amount on the back of the envelope after every transaction.

  1. Use money carefully.

Every time you need to spend on one of the categories, use the money from the envelope. Updating the balance left will help you keep track of your expenses. If you run out of money in a category, you can only do two things: either stop spending in that category or adjust money from other envelopes knowing that the budget for those categories is insufficient now.

Taking the envelope budgeting method digital

There are many disadvantages to using the envelope method for budgeting. If you lose an envelope or it gets stolen, you’ll lose everything in it. It can also be inconvenient to carry cash around for every expense. Therefore, you can digitize your envelope budgeting method. You can use various budgeting apps and software to stay on your financial track. Whatever you use, don’t be Dave.

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