How Does Envelope Budgeting Maximize Your Savings Potential?
What you'll learn
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.
