If you’ve ever looked at your bank account on the Monday after payday and wondered where all your money went, you’re not alone. A July 2021 survey by Bankrate found that 51% of respondents have less than three months’ worth of emergency savings. And 25% said they have no emergency savings at all, while another 26% say they have some, but not three months worth of emergency savings.
Feeling anxious about money is incredibly common. The Mind over Money survey by Capital One and The Decision Lab found that:
- 77% of Americans report feeling anxious about their financial situation.
- 58% feel that finances control their lives
- 52% have a hard time controlling their anxiety about money
One of the tried and true ways to both build savings and reduce money anxiety is to make—and stick to—a budget.
Budgets come in many formats and it’s important to choose one that works for you and your finances. If you’re interested in a cash-focused budget that limits spending and reduces your ability to spend away bill payments or savings, you may want to consider an envelope budget.
How To Use The Envelope Budget Method
The concept of the envelope budget is simple: money is finite and you can’t spend it if it isn’t there. When using the envelope saving method, you would take your entire paycheck in cash and split it into distinct categories. Here are the envelope system categories you should designate your money toward:
Needs: Money in this category is set aside for things that must be paid like rent, utilities, recurring debt like auto or student loans, transportation costs, and groceries. These are non-negotiable expenses and often are fixed—meaning it’s easy to earmark exactly how much to set aside.
Savings: There’s an old adage to pay yourself first. The savings envelope is where you set aside a fixed amount to help meet goals. It may be a certain dollar amount or a percent of your paycheck. When calculating how much to save, make sure it’s attainable. One of the benefits of envelope budgeting is that you don’t have to eat only rice and beans or spend all your money right after payday.
Wants: After setting aside money for savings, the wants envelope acts as your discretionary spending money. Eating out, attending events, shopping or any other nonessential purchase comes out of this fund. But, when the wants envelope is empty, there’s no more spending. You cannot pull from other envelopes to make purchases that would fall into the wants category.
Before you start socking money into a manila folder, though, you’ll need to set a budget, and before you set a budget, you need to know your expenses. Sit down and look at your bank statements and see where your money is going. There will be recurring expenses like housing or subscriptions, and variable expenses like groceries and dining out. Get totals for how much you spent in a month, consider what you want or can change, and then start stuffing envelopes or use one of the numerous budgeting apps available on iOS or android.
Determining your envelopes
While simply taking money meant for bills and savings out of your wallet may be enough, some people decide they want to get more granular with their cash envelopes for discretionary spending.
Looking at your usual spending habits, you can allocate hard numbers to frequent categories such as:
- Dining out
- Clothes shopping
- Entertainment like going to the movies or concerts
- Household items
- Treats
These additional envelopes will depend on what you like to do and spend money on, but there can be a designated category for anything you want.
Envelope budget system modifications
Beyond making more granular envelopes, there are other modifications you can make to the envelope budget system.
Eliminate fixed bills from the equation. These days, it doesn’t make sense to keep your rent or minimum credit card payment in cash, especially since you’ll likely need to deposit it to make a payment. Consider your online account another envelope for fixed expenses and set things like loan payments, housing costs and utilities to auto-pay.
Vary your envelope stuffing. Some people stuff their envelopes by paycheck. Some find having different envelopes for each week works best. Find the cadence that works best for you and allows you to feel more comfortable with your budget.
Decide what to do with unspent money. If being more aware of your spending leads you to reduce impulse purchases and end up with money left over, it’s important to know where you want to put that cash. Maybe you want to throw all your extra money at debt, or save it for a vacation. It’s your money, make sure it’s working for you.
Is The Envelope Saving Method Right For Me?
Spending and saving money is incredibly personal, so it’s important to choose a budgeting system that you can stick to and that fits your lifestyle.
Pros of envelope budgeting
- Easier to save money: Confronting an empty envelope or seeing that you only have a few bills left can make it easier to make thoughtful purchases. Additionally, if there isn’t cash in the envelope, it’s much harder to justify opening another one that isn’t designated for that purchase.
- Easy to adjust: If after a few months of using the envelope saving method you find that you always wish you had more money for restaurants but never seem to empty your clothing envelope, it’s easy to adjust and reallocate funds.
- Good in case of emergencies: Many people just don’t carry cash anymore, which doesn’t do much good if there’s an emergency and they need to pay for a tow or a ride after your car breaks down.
Cons of envelope budgeting
- Incongruent with current shopping habits: Let’s face it, you’re doing a lot of your shopping online. Keeping discretionary spending in an envelope can limit where you can spend those dollars, even if it’s in budget.
- Cash isn’t always accepted: Some businesses are moving away from cash. If you’re keeping all of your budget in envelopes, there is a chance you’ll run into places where your money isn’t good.
- Can be hard to track spending: Using a debit or credit card means you get a statement at the end of the month with all your purchases. If you aren’t keeping receipts or writing down purchases, you may not know where all your money went.
Meet Your Savings Goals With Arizona Central Credit Union
Everyone budgets for different reasons. Whether you’re hoping to pay off high-interest debt, save for a major purchase like a down payment on a car or home, or just get a better sense of where your money is going, the first step is taking control of your finances.
Arizona Central Credit Union can help you meet your financial goals. Contact us or visit any of the locations across Arizona to learn how we can help you work toward better money management.
