Envelope budgeting is a tried-and-true budgeting method that involves dividing your income into a variety of different categories. These categories are represented by paper envelopes, which you fill with the allotted amount of cash to spend for the month. It’s that simple!
Find out what the pros and cons are for this popular budgeting method.
Pro: Prevents Overspending
Envelope budgeting is effective at preventing overspending. So, if you have a bad habit of draining your paycheck early and going into overdraft, this could be a great budgeting method to take on.
How does it prevent overspending? It sets clear spending boundaries. You can only use what’s available in your budgeting category’s envelope. Once that envelope is empty, you won’t be able to spend more. You’ll have no choice but to wait for payday or re-evaluate your budgeting categories.
Another way that envelope budgeting prevents overspending is that it encourages you to use cash over digital funds. Cash hurts to spend more than digital funds. That’s because cash is tangible and visible — you can watch the paper bills leave your wallet and realize you have nothing left. With digital funds, you can swipe a card without knowing the status of your account.
Con: You Could Forget Categories
When you build your own budget, you could forget some important spending categories. You could remember all of your immediate needs but let other “less immediate” needs slip your mind.
One example of a common missed category is emergency expenses. If you don’t remember to assign an envelope for emergencies, you might not have enough funds available to cover an unplanned, urgent expense. What if your toilet overflows and you need to call a plumber? What if your car gets a flat tire and you need to call a tow truck? What if you get a terrible toothache and need to rush to your dental clinic? All of these are situations that can’t be neglected until your next payday.
If you don’t have enough savings, you’ll have to turn to alternative payment methods to help you recover an emergency. You could use a credit card, as long as there is enough room on the balance. Or you could go to a website like CreditFresh to see whether you’re eligible to apply for a personal line of credit. A personal line of credit loan could give you temporary funds to cover your emergency expense in a short amount of time. After using those funds, you could follow a repayment plan through a basic billing cycle.
Don’t forget important categories in your envelope budgeting system. These are some categories that you should include:
- Emergency savings
- Holiday spending
- Debt repayments
- Household maintenance expenses
Pro: It Encourages Mindful Shopping
Envelope budgeting encourages you to be more mindful of your spending. You don’t want to run out of money and empty an envelope too early in the month, so you’ll have to be thoughtful about every single expense you make. You’ll be less likely to impulsively shop and spend beyond your means. You’ll think before you open your wallet.
Con: Digital Expenses
Nowadays, the majority of your expenses will be digital (or at least, have the potential to be). So, reserving cash for all of your expenses isn’t the best solution. This doesn’t mean that the envelope budgeting system isn’t useful! It means that you might have to modify the method to suit the modern era of digital banking.
How? You can divide your expenses between digital and cash, minimizing the number of envelopes you need to put out. Your digital expenses could be automated bills like mortgage payments, insurance payments and utility bills. Your cash expenses could be everyday expenses like groceries and gas.
Another option is to download a budgeting app that creates digital envelopes, like Mvelopes or GoodBudget. These are considered some of the top budgeting apps available.
You’ve seen the pros and cons of envelope budgeting. So, what do you think? Is it the right method for you?