It’s no secret that our society prizes immediate gratification. Because of this mentality, the average American carries nearly $38,000 in personal debt. Moreover, the vast majority of us live paycheck to paycheck.
With this lifestyle, small emergencies can completely abolish any chance of financial security, forcing us to accrue even more debt. How can we disrupt this cycle? How can we get out of debt? At such times, taking out an emergency loan could make more sense rather than ignoring the emergency.
When it comes to learning how to cut back on costs and save money every month, few strategies are as effective as the envelope budgeting system.
If you want to control the spending on each of your budget categories for the month then the envelope system is for you. You need to pre-decide the exact amount of money you want to allocate to each budget category and put the cash in different envelopes.
Keep reading for our step-by-step guide on implementing this strategy in your life.
1. Understand Your Finances
First, you need to take the time to dig into your bank statements to understand where all of your money goes each month. Most people are shocked to see how much unnecessary spending they do on things like eating out, getting coffee, shopping, and more.
Figure out exactly how much money you make each month, how much is spent (on average), and where it goes. From here you can get a good idea of how much cash to put in each envelope as well as where you can afford to cut back.
2. Create Expense Envelope Categories
Now it’s time to create the categories for your envelope budgeting system. Use the following categories but feel free to modify as necessary:
- Short-term savings (for budget traveling, house renovations, etc.)
- Long-term savings or investing
- Health (gym memberships, supplements, etc.)
- Personal care
- Non-essentials (dining out, entertainment, etc.)
3. Determine How Much Money You Need for Each Envelope
Once you have your categories, you need to decide how much money to put in each envelope. Give yourself a practical amount, allowing for small fluctuations. For example, your general grocery bill will be higher during weeks when you need to buy extra items like dog food, personal products, etc.
However, remember that the goal is to save as much money each month as possible, so think minimally.
4. Maintain Rigidity in Your Envelope Budgeting System
While it may be tempting to shuffle funds around to leave yourself more money for the fun stuff, remember that without rigidity, the envelope budgeting system doesn’t work. Now, if you have funds in a category left over at the end of the month, you can put that money towards rewarding yourself with dining out, shopping, or entertainment. However, it’s important to keep your financial goals in mind when feeling impulsive.
5. Be Prepared for Contingencies
Finally, while rigidity is important, you also need to prepare for potential contingency situations. For example, a lot of bills, services, and products are paid for online. In this scenario, we recommend using fake money or slips of paper with specific amounts written on them to be place holders in the corresponding envelopes.
Looking for More Tips on Budgeting or Saving Money?
As we always say, you don’t have to be rich to live rich. Check out the other articles about you and your money on our blog to learn more about budgeting techniques, saving money, and retirement planning. Good luck and remember, consistency is key with any type of goal!