What is envelope budgeting and why does it work?

Envelope budgeting: Envelope budgeting is a traditional personal finance method that involves allocating specific amounts of money for various spending categories by physically separating cash into envelopes. However, despite the increasing redundancy of cash, the envelope strategy is still highly effective and only has gotten better with digital tools and wallets to enable effective classification of money. 

A budget is telling your money where to go instead of wondering where it went - Dave Ramsey.

The primary objective of envelope budgeting is to exercise disciplined spending and ensure that individuals or households stay within their designated budget for each category. 

Why does envelope budgeting work?

Envelope budgeting is highly effective and suggested by many due to its psychological and practical principles that disciples you to spend only what you have in that respective wallet. 

• By separating the money you have into different segments, you give yourself a clear visual cue of available funds for the respective category. 
• Envelope budgeting also makes it easier to track your finances and monitor your expenditures.
• This method is highly effective in building a control mechanism that prompts you to reconsider any big purchase that you are planning.
• It encourages alignment of spending with financial goals without compromising essential expenses.
• It allows adjustments to allocations based on changing circumstances or priorities which makes it easier to follow.
• Envelope budgeting also increases your awareness about the way you spend your money and makes you more disciplined towards your expenses

How to start envelope budgeting?

Starting with envelope budgeting is not difficult and one only needs the determination to start with the process. Here is a step-by-step method following which you can start with envelope budgeting. 

Listing your expenses

Begin by categorising your expenses, such as groceries, dining out, investing, entertainment, utilities, rent/mortgage, savings, and so on in a list. 

Allocate funds

Assign a predetermined amount of money to each category based on your monthly income and financial goals. 

Image credit: Unsplash

For instance, if your monthly income is Rs 1,00,000 you might allocate Rs 10,000 for groceries, Rs 5,000 for dining out, and Rs 7,000 for entertainment, and so forth.

Create digital envelopes

In the traditional method, you would create physical envelopes for each category and place the allocated cash inside. However, today, choosing digital envelopes makes more sense and you can do that by dividing your income into different bank accounts or different digital wallets specified for specific expenses. 

Image credit: Pexels

The apps specified for envelope budgeting allow users to set up virtual envelopes, allocate funds, track transactions, and receive notifications when approaching or exceeding budget limits.

Track spending

As you make purchases or incur expenses, deduct the amount from the corresponding envelope which will allow you to have a clear understanding of how much money is left for each category and encourage mindful spending.

Adjust as needed

At the end of each month or a designated period, evaluate your spending habits and adjust the allocations for the following period. If you consistently overspend in one category, you may need to reallocate funds from another category or find ways to reduce expenses.

Advancements in technology have led to the development of digital envelope budgeting tools and apps that replicate this method electronically.