Making a budget is the first step in responsible financial management. The envelope budgeting technique is one tool that may be used to maintain tabs on monthly spending. It requires putting money in many envelopes, each of which stands for a different category of spending. It is possible to adapt this method for use with mobile budgeting apps.

The Basics of Envelope Budgeting

A personal budget is a system of record-keeping used to monitor financial resources and obligations. According to a survey, over 80% of Americans say they have a monthly budget, and 88% of respondents think everyone should keep a regular budget.

The two most prevalent methods of budgeting are the zero-based budget and the annual budget.

Mobile budgeting apps make it possible to create digital envelopes for tracking debit card purchases, making the cash envelope technique of budgeting just as accessible as ever.

How the Envelope System of Budgeting Functions

Envelope budgeting is a straightforward approach to financial planning. However, there are certain steps that must be done for a successful installation.

Add Up the Wages and Salaries Each Month

Before you can start using the envelope method of budgeting, you need to know how much money you take in each month. You may consider this your monthly budget, since it includes all of the money that will come into your account. Choosing the Cash envelope system is essential here.

Prepayments for the tax credit or donations to the stimulus package

If you expect to receive any one-time payments this month, such as a tax refund or a rebate, please provide that information as well. However, you don’t have to do this.

You may get a baseline average income if your self-employment earnings are unpredictable by adding up all of last year’s profits and dividing that number by 12. This should give you a ballpark figure for your average monthly income.

Create Spending Groups

The next step in envelope budgeting is deciding which kind of purchases will fit inside your envelopes. Envelope budgeting often excludes the “fixed” element of one’s budget, which includes things like rent, utilities, insurance, and principal payments on debt. These costs are relatively consistent from one month to the next. These bills may be paid in a variety of ways, including electronically with an ACH transfer, with a credit or debit card, or with a paper cheque. If your spending habits change from month to month, divide your cash into several envelopes based on the categories you’ve established.

You may get a decent idea of when and where you spend the most or least money by looking at your bank statements from the last three to six months and comparing the amounts.

Distribute the budgeted sums among the envelopes.

The next stage in creating a budget is deciding how much money will go into each category once you’ve determined your income and chosen the categories to include in your budget. Take the following into account: Each month, you have a total discretionary budget of $1,500. Your total cost would be $1,234 if everything was paid for. You’d be left with a surplus of $266, which you might put into one of your budget’s cash envelopes. Separate that sum into as many envelopes as you choose, allocating some to the care of your pets, some to the expenses of raising your children, and the remainder to gifts and donations.