Spending digitally is convenient and easy. To make some serious savings and make sure you don’t overspend, cash is the way to go.

The envelope system is one of the most traditional and oldest methods of budgeting and undoubtedly, one of the simplest methods to follow. The idea behind envelope budgeting is meeting your monthly expenses with cash stashed in physically separate envelopes.

We walk you through the process of getting your envelope budget together.

A Step-By-Step Guide to the Envelope System of Budgeting

1. Define the spend categories

The first step is to identify where you spend your money each month. The most common areas of expenditure include house rent, school fee, fuel, groceries and recreational spending. You may modify categories based on your specific needs.

2. Assign envelopes and allocate budget to each spend category

The next step is to assign envelopes and define how much cash you want to limit to each category. You may have to withdraw large amounts of cash from your bank account for this purpose.

For smaller payments, you can use physical envelopes to store cash. For bigger expenses like house rent for instance, where payments are usually made digitally or through cheques, it is easier to keep a virtual record.

[Related: ‘No Spend Days’ – Does this new budgeting fad work?]

3. Use the envelopes to pay for the intended purchase

Use designated envelopes for all expenditures. If you run out of cash in an envelope before the month ends, you will better understand your spending habits and whether you overspend In that category. Be careful not to shuffle cash from one envelope to fund another. The whole point of this method is to control your spending.

4. Review your performance

Finally, it’s time to review. If you have money left in an envelope at the end of the month, you can either roll it over or celebrate your little win. However, if you fall short in a certain category, learn creative ways to make your cash stretch.

[Related: 5 Common Budgeting Problems & Their Solutions]

Having Trouble with Cash?

For some people, handling wads of cash can indeed be an issue. Fortunately, there are many apps that offer a modern take on the old-school envelope system.

‘Goodbudget’, for instance is an app that has revamped the tried-and-tested method for the digital age. You also get the option to sync your budget across multiple devices so you can keep a track of your expenses on the go.

Benefits of envelope budgeting

Here’s why the envelope method is a success.

  • You think through every purchase and are less likely to indulge in wasteful spending.
  • Your budget becomes tangible by limiting credit card use so sticking to your budget is easier.
  • It helps discipline your spending habits which in turn makes it easier for you to achieve your financial goals.

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