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Envelope Budgeting: the what, the why, and the how

how to create a budget once and for all

     Who here is groaning at the thought of even thinking of budgeting? I was blessed with a mom who was a budgeting queen. She, in turn, taught me how to budget when I graduated college and started living on my own.

     To start, budget is not a dirty word. It’s not this dictator in your life where it tells you that you’re not allowed to ever do anything fun or buy anything not absolutely necessary. 

     A budget is simply making your money work for your goals instead of spinning your wheels and spending, wondering why the heck there’s so much month left at the end of your money. 

     I am the sole earner in my house, and as a teacher, it’s not the most robust of incomes. So, in order for us to live a decent sort of lifestyle, I need to budget. There are many different ways to budget, but I’m going to show you the envelope method of budgeting. 

     Buckle up, because we’re going to be getting down into the weeds of your money. 

Step 1: Identifying your expenses

     In order for you to be able to figure out your budget, you will need to have a sound understanding of what money you bring in each month and what money goes out each month. This seems simple, but it’s really what underlies every money choice that you make when it comes to your budget. So, take a bit and log into your bank, your credit cards, etc. Write down all of the categories for your expenses for the last month (if you really want to go for it, look for the last three months’ expenses and get an average of them).

budget spreadsheet

     Here are some categories to get you started (all included in the spreadsheet, with options for filling in your own categories).

Home- Rent/Mortgage; Heating; Electric; Internet; Water; Insurance; Furniture; Home Improvement; Trash Removal
Living- Groceries; Medical; Phone; Clothes; Personal Care; Cosmetics; Savings
Debt- Student Loans; Car Payment/Lease; Credit Cards; Medical Debt
Transportation- Bus/Train Fare; Insurance; Gas; Maintenance/Repairs; Tires; Licensing
Entertainment- Streaming services; Fun Money; Dining Out; Movies/Concerts; Cable; Video Games; Gifts

Step 2: Identify all consistent income

     Now, once you have all of your categories totaled up, let’s take a look at your income. If you have a position where you get the same amount every paycheck, multiply that amount by two (if you’re paid bi-weekly) or four (if you’re paid weekly) and add that to the top of column B. If you have a position where you’re an hourly worker, average out the amount of hours you normally work, and calculate based on that (ex: if you average anywhere from 32-40 hours a week, budget based on 36 hours per week, and what your check would look like for that).

     Some people tell you that you should be looking at your budget every single month, and while that’s great if you can, I know that my mental bandwidth gets eaten up pretty quickly and I don’t want to take the time to sit down with my money and reallocate. What I do instead is think about the year on a whole. 

     You may have noticed when I asked you to calculate the amount of money you made in a month, the total amount of money ends up adding up to 24 paychecks (or 48 for weekly). This is intentional. This type of budgeting will actually end up leaving you with approximately a month’s worth of expenses extra at the end of a full year in each category.

     Now that we’ve done the initial work, take a short break. Go do something fun or relaxing for ten-fifteen minutes, and then come back to this. Especially if budgeting is something that you’ve been putting off, adding this small window of rest will be helpful to keep your mind in a state of rest instead of frazzlement.

Step 3: Comparing and Creating


     Have you taken that break? Awesome! Now we get to the nitty-gritty of your budget. This is where we compare your two sets of numbers (income & expenses).

     I want you to put in all of the money that you have to spend each month in order to continue covering your basics first (rent, food, transportation, debt payments, etc.). These are your core expenses that you need to make sure that you have covered.

     Once you’ve done that, now you’ll look at the budget and calculate how much income you have remaining for the other categories in your budget. There are a couple of ways to do this. 

     The second is to start with the categories you want to keep the most, and allocate the money you want in there first. Once you’ve gotten that, look at the remaining categories. Which are the ones that you’re willing to live without? What are the ones that are nice to have, but not necessary?

     The first is to enter in the amount of money you’d like to spend in each remaining category, and see by how much you’re falling short. Then adjust the amount in each section until it balances.

Step 4: On to the envelopes! 

     Once you’ve created a balanced budget, now is when you get out your envelopes and write out your categories. I just use regular envelopes from the store, but there are some cute printable envelopes on Etsy if you’d like to bring some fun into your budgeting. 

     Now, once you have all of your envelopes written out and ready, it’s time for actually allocating the money.

budgeting with cash

     The next time you get paid, go to the bank and withdraw the full amount of your check (or approximately the full amount. For example, last year, I was paid $1,136.15 every two weeks, but I pulled out $1,135.) Experiment with the denominations you want to receive. What I tend to do is get $600-$700 in big bills and get the rest in $20s and a few smaller bills. This is what works for me, but figure out what works best for you and your situation. 

     Once you’ve withdrawn your money, sit down and pull out your budget. Put the money where it is supposed to go (e.g. if you put aside $600 for rent every two weeks, then that’s what you put in there). Put down the date and the amount of money added in. Continue until you’ve put all of your money into its corresponding envelope. Put these away someplace safe. 

Step 5: Pay those bills

     As your bills come up, retrieve the budgeted envelope, take out the necessary amount, and update the total on the envelope. As you gain more practice with this, the amounts will become automatic and you won’t even need to pull up your budget. 

     If you find yourself overspending in a certain category, first reflect on your expenses. Was there an unexpected issue? Did you not think about it much and just spent? Does it feel too low and therefore feel restrictive? Your budget, as I said at the beginning of this blog post, is not a dictator. It can be fluid. As you get used to budgeting, you’ll have a better feel of your cash flow. You’ll see where you can fine tune your approach.

free budget spreadsheet