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What is envelope budgeting?

Envelope budgeting, also known as “cash stuffing” on TikTok, is a simple way to manage your money by using cash.

Here’s how it works: You label different envelopes for things like groceries, entertainment, and other expenses. Then, you divide up your spending money and put the cash in these envelopes.

The goal is only to spend what’s in the envelope for each category until your next budget period (usually a month).

This method is widely used all over the world. Some people use envelopes, while others use jars or small boxes. It works because you physically see the money you have left, which makes you more aware of your spending.

Key Takeaways:

• Envelope budgeting uses cash to allocate funds to specific spending categories.
• It increases awareness of spending and helps control overspending.
• Pros: Prevents overdrafts and supports saving goals.
• Cons: Handling cash is time-consuming and can be less secure.

How does envelope budgeting work?

Step 1: Figure Out Your Available Funds.

Start by adding up all your income. Then, subtract the bills and fixed expenses that you can’t avoid, like rent or taxes. Whatever is left is your available spending money.

Step 2: Create spending categories.

Next, make a list of the things you spend money on regularly, like groceries, transportation, and entertainment. Here are some examples:

• Groceries: food, snacks, and other essentials.
• Transportation: gas, bus fare, or Uber rides.
• Entertainment: eating out, movies, or fun activities.
• Household items: things like detergent or cleaning supplies.
• Personal care: shampoo, lotions, cosmetics, etc.

Once you have your categories, divide your available cash among them. Here’s some advice for those just starting out:

• Groceries: It’s a good idea to set aside a bit more cash for groceries. Running low on funds for food can be frustrating and might tempt you to overspend. Plus, having extra money can help if you want to splurge on nicer snacks or meals, especially on weekends or during tough times.
• Transportation: You don’t need to be exact with your gas budget. Just estimate how often you fill up each month and the average cost per visit to keep things simple.
• Entertainment: It can be tricky to figure out the right amount for entertainment at first. Use any leftover funds after covering essentials and savings to budget for fun activities.
• Household Items: Some items, like detergent, last for several months, and things like brooms don’t need replacing until they’re worn out. Calculate the total cost for these items and set aside a portion of that amount each month.

Step 3: Stick to the envelopes.

Once you’ve put the money in the envelopes, that’s all you can spend for the month. If you run out in one category, you can borrow from another, but remember—you’ll have less for that other category later.

Pros and Cons

Pros

• Prevents you from overspending.
• Helps you save more easily.

You’ll only need to hit the ATM once a month, making it easier to stay on top of your spending. By using cash from your envelopes for purchases, you’ll be more aware of your budget and naturally track where your money goes, helping you save more effortlessly.

Cons

• Holding cash at home can be risky.
• It takes time and discipline to manage.

Keeping your money in a bank is safer because it’s protected by security and insurance. Storing cash at home can be risky. Plus, managing the envelope system takes regular effort—you’ll need to set it up and keep it organized, which can be a bit of a hassle and requires consistent discipline.

Final thougts

Envelope budgeting is an easy way to manage your money by using cash for different spending categories. It helps you stick to your budget and save more by making you more aware of your spending. While it needs some effort to set up and handling cash isn’t as secure, it’s a great method for keeping your finances on track and building better spending habits.

Like many, I started working right after graduation. My first salary felt substantial compared to my student earnings and gave me a sense of freedom. However, after a few months, I noticed I wasn’t saving much. It didn’t make sense—now that I was earning more, why was I saving less? So I took a closer look at where my money was going, and that’s when I found the culprit: lifestyle creep.

While lifestyle creep can quietly eat away at your income, the good news is that there are ways to manage it and keep it from derailing your financial plans.

Key Takeaways

1. Lifestyle creep is when increased income leads to proportionally higher spending, reducing your ability to save.
2. Lifestyle creep can undermine savings goals and financial stability, making it harder to save for emergencies, retirement, or other major goals.
3. To manage lifestyle creep, use a budget to control spending, set clear financial goals to stay focused, and automate savings to reduce temptation.
4. Regularly review and adjust your savings rate, especially when you receive a raise, to ensure your financial goals stay on track.

Understanding Lifestyle Creep

What is Lifestyle Creep?

Lifestyle creep, or lifestyle inflation, happens when your spending gradually increases as your income grows. It’s completely natural to want to upgrade your lifestyle when you start earning more—after all, it can feel like a reward for all your hard work. But this can easily lead to overspending simply because you can afford to.

Without a solid budget, that extra income can quickly disappear. And when your spending rises to match your pay, it leaves little room for saving toward bigger goals like building an emergency fund, planning for retirement, or achieving other financial milestones.

In the long run, being aware of lifestyle creep is crucial. By setting limits on your spending, you can enjoy your raises and promotions while still making progress toward your financial future.

Examples of Lifestyle Creep

Lifestyle creep isn’t always about splurging on luxury items.

It can sneak into everyday habits. For instance, maybe you’ve convinced yourself that eating out most nights is justifiable because you’re too busy to cook. Or perhaps you believe you need a whole new wardrobe for your job every few months.

These small changes can add up fast, quietly inflating your cost of living without you even noticing.

Effects of Lifestyle Creep

How Lifestyle Creep Affects Your Finances

Saving for retirement or emergencies is essential, no matter your income level. But when lifestyle creep goes unnoticed, it can undermine those efforts.

You don’t need to be making six figures to experience lifestyle creep, even modest earners can find themselves spending more than necessary. 

You might think you need to buy a new outfit for every occasion or justify regular splurges because “you’ve earned it.” Over time, these habits can chip away at your savings, leaving you financially vulnerable.

Strategies to Manage Lifestyle Creep

Lifestyle creep can sneak up on anyone, but the good news is that there are simple ways to manage it. Here are three effective strategies to keep it in check:

Creating a Budget

Think of a budget as your financial roadmap. Just like a sailor relies on maps to avoid getting lost at sea, you need a budget to stay on course with your money. 

By assigning every dollar a job, you’ll avoid accidentally spending it on things you don’t need.

One of the best ways to tackle lifestyle creep is by using the envelope budgeting method. This involves dividing your expenses into different categories (or “envelopes”) and allocating specific amounts of money to each one. 

With this system, you know exactly where your money is going, making it easier to avoid overspending. Plus, it helps you spot areas where you can cut back.

Setting Financial Goals

Setting clear financial goals is another powerful way to manage lifestyle creep. When you have a goal in mind—whether it’s saving for a vacation, a new home, or an emergency fund—it becomes easier to stay disciplined.

Having a goal keeps you from making impulsive decisions that could derail your progress. Obstacles may arise, but when you’re focused on your goal, it’s easier to resist temptation.

As Goethe once said, “Desire presses ever forward.” A clear goal gives you that extra push to keep moving in the right direction.

Automating Savings

One of the simplest and most effective ways to combat lifestyle creep is by automating your savings. 

The saying “out of sight, out of mind” really applies here. By setting up automatic transfers from your checking account to your savings, you remove the temptation to spend that extra cash.

But there is a catch—don’t forget to adjust your savings rate when you get a raise or promotion. A good sign that it’s time to increase your savings is if you notice extra money lingering in your account at the end of the month. That’s your cue to give your savings plan a little tweak!

Final thoughts

Lifestyle creep can quietly undermine your financial future, regardless of your income. By understanding it and implementing strategies like budgeting, goal-setting, and automating savings, you can enjoy the benefits of increased income without sacrificing long-term financial security.