You know, sometimes in a world with all the technological marvels that we have it's interesting
to see how the simpler, old-time, tried and tested way of doing things still seem to work
as well, if not a little better in some cases, than the new stuff.
Hey everyone, Daniel here and welcome to Next Level Life a channel where you can learn about
Investing, debt, retirement, and many other general financial education videos because
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Today, as you can no doubt tell by the title of the video, I'm getting back to my series
on the different methods of budgeting by taking a look at one of the oldest and most well-known
budgeting strategies...
the envelope method.
If you're new to the channel, or if you just want to check out some of the other budgeting
methods that I've already covered I've left a link to my budgeting playlist in the description
below.
But in today's video, I'm going to be going over what the envelope method is, as well
as who I think it would work best for, and talk about how it can fail.
So with that out of the way, let's get started.
WHAT IS IT?: So what is the envelope method?
The envelope method also sometimes known as the cash-only budget or even the clip system
if you follow Rachel Cruze is just a method of budgeting where you keep cash tucked away
in envelopes that are labeled for specific spending categories such as groceries, restaurants,
entertainment, gas, and clothing.
This budgeting system works by forcing you to allocate certain portions of your income
for these variable expenses.
You'll notice that I did not include rent or mortgage payments or Insurance or even
cell phone bills in that earlier list.
And that's because those expenses are usually a lot easier to predict and are a lot more
stable.
So most people using the envelope method do not take out the cash for those categories
(they often have them paid automatically).
And that’s fine because the goal of the envelope method is to just control spending.
It’s by no means an exhaustive budgeting strategy.
This isn't the zero-sum budget after all.
So with that being said, how does the envelope method actually work?
Let's take a look at the steps.
Step 1 to using the envelope method is to create a budget because the envelope method
in and of itself is not really a full budget as I said it's a way to control spending in
areas that usually tend to break the budget for you.
The category that breaks my budget the most is food so I'm going to be using that as an
example in this video but the categories that give you the most issues may be entirely different.
So you start by creating a budget that reflects your Current financial situation.
It won't be perfect and you'll need to adjust as you go on but that's okay just do the best
you can.
Step 2 is where you separate your expenses because expenses like a mortgage payment or
rent are usually pretty much the same from month to month whereas things like entertainment
expenses or food can vary pretty wildly and those kinds of variable expenses that the
envelope method tries to control.
Once you've done that you move on to step 3 which is where you divide your spending
into categories such as food, gas, clothing, entertainment and any other categories that
apply to your situation.
Step 4 is to create an envelope for each of those categories you just listed and fill
them with the money you've allotted into that particular category or just indicate on the
envelope if you haven't been paid yet the amount that you're going to spend in that
category.
So let's say you've budgeted $500 a month for groceries, but you don't actually have
$500 lying around right now to put in that envelope.
That's okay you can still use the envelope method, just write down $500 on that envelope
so you know how much you've budgeted for the month and then when you get your first paycheck
you take $250 from your bank account (assuming of course that you're paid twice a month)
and put that cash into the food envelope.
When you get your second paycheck you do the same thing again take $250 out of your bank
account and put it in that envelope that's your $500 food budget for the month.
You also do this for all the other variable categories that you want to control your spending
in.
Step 5, of course, is to spend as the month goes along using money from the appropriate
envelopes and only the appropriate envelopes mind you this budget is not going to work
if you start shifting money between envelopes.
And I should clarify that by saying it's okay to adjust your budget as you're going along
because again you're not going to get it perfect right off the bat, but you don't want to be
taking money out of the food budget in order to buy that nice pair of jeans that you saw
because then you're going to run out of food money.
Or you're going to have to bring money from a different envelope into the food envelope
and then you're going to run out of money in that category and eventually it's just
an endless cycle and you're not actually controlling your spending.
Which kind of defeats the purpose of using this method.
Moving along step 6 is to put any leftover money you might have either into savings or
use it to pay down any debt you might have or even roll it over into next month envelope.
This is something that I did when I was using the envelope method, because as I said food
was a really difficult category for me to control my spending in.
So what I would do is I would roll over any money that I had left over in my food envelope
into the next month so I had a little bit of a buffer in case I slipped up and overspent
one month.
That way I wouldn't feel as bad about it because I still had the money in the envelope but
I also kept a tally of how much I was spending each month in food on the front of the envelope.
And even though I had extra money after the first few months in that envelope I tried
my best to stick to the original amount that I budgeted.
Like I said this made it a lot easier for me to not get too discouraged or stressed
out if I slipped up one month but also because I kept a tally of how much I was spending
helped me to control my spending in the food category.
Finally step 7 is to refill the envelopes at the end of the month and do it all over
again.
WHO SHOULD USE IT?: So who does this method work best for?
Well in my opinion it would probably work best for those who, similar to me when I was
getting out of college and just starting to make my way in the world, tend to overspend
in those variable categories like food or entertainment because the whole goal of this
method is to create a system that helps you to keep your spending under control.
A couple of things to keep in mind though is as I've already said don't be afraid to
tweak your category amounts over the first few months until you arrive at numbers that
work for you because it's very unlikely that you're going to get the numbers all correct
on the first try, I certainly didn't.
Another thing that I found really helped me was to reward myself when I did come in under
budget.
Like I said food was the toughest category for me personally to control so whenever I
came in under budget I rewarded myself by going out to dinner and extra time that next
month.
WHY IT CAN FAIL: And I think was something like the envelope
method those are very important things to keep in mind because it can very easily fail
if you allow yourself to get too discouraged or beat yourself up for slipping up one month
or if you start borrowing from other envelopes to keep up with another category.
If you think that this kind of thing will be a consistent problem for you then you may
want to try a different budgeting method.
Thankfully, there are a ton of other ones out there and I will be continuing to cover
as many of them as I can as we go forward.
CLOSE: So that was the envelope method.
I know that this was a little different from my other videos and it didn’t have a ton
of numbers put to it, but hopefully, some of you found some value in it.
But that'll do it for me today once again if you enjoyed this video be sure to subscribe
and hit that Bell next to my name so that you'll be notified of all my future uploads.
I generally upload every single Friday, and if you have a friend that would be interested
in this kind of content be sure to share it with them and let's really get this information
out there and start our own Financial revolution.