Finance Friday: How to Budget Using the Envelope Method

Hi there! So last Friday, we talked about the basics of budgeting. Here's a recap:

Identify your source/s of income, identify whether it's fixed or not, list down the fixed non-negotiables, list down the fluid non-negotiables, list your debts, create flex, save for short-term stuff, allot for leisure, and make sure all of these are not more than what you make.

Easier said than done, right? Now, I hope you were able to get the basics of budgeting down to pat, but that's not the hardest part. Not even close. After you had made a budget, you need to implement it. In other words, you need to stick to it. How?

One of the easiest - and my favorite - methods of budgeting is the Envelope Method. It's really easy. The principle is to separate your money into different envelopes, which stand for the categories you had created. This way, you only spend what you allotted for each category.

For example, if you allotted P1000 for your leisure money, and you already spent P500 for a movie, it means you can only spend another P500 for leisure for the rest of the month. You cannot borrow from other envelopes. No cheating!

What I like about this method is that I can immediately see what's left of my allocations for my budget categories. It's different to see P6000 all bundled up together. I might be fooled into thinking I have budget for a cheap camera (which I really need). However, when the same amount of money was rightfully separated into envelopes, I would know that I still need to deposit half of that amount for stock investments, a fourth for groceries, and so on.

Plus, in the absence of a tracking app or a planner, envelopes can readily serve as money trackers. What I used to do before was each time I get money from a certain envelope, I write down the details on that envelope. I write the date, the amount I "withdrew," and the reason. This way, I wouldn't wonder where my money went!

Finally, at the end of the month, you can decide whether to pool together all the remaining content of the envelopes or leave them as is. You can let them rollover to the next month for you to have a "bigger" budget. On the other hand, you can also remove all remaining cash and go back to zero for the first month. You can spend the remaining money to treat yourself, but I suggest you save part of it. Better yet, save all of it!

Will this method also work for you? Why don't you try it and tell me how you did it? Please also tell me about other budgeting methods you know!

PS: All the budgeting methods in the world wouldn't work if you lack self-control and discipline! If you really want to achieve financial freedom, develop your character first! (Really, I'm one to talk when I'm still a work in progress, no?) ;-)

Image from Pinterest

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