Meet Envelope Budgeting: Uncovering Undetected Expenses!

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I’m curious about the technique of saving money using envelopes. Usually, there’s a term called envelope budgeting. This method involves dividing the budget into different spending categories and placing cash for each category into separate physical envelopes. Many people say this method is very effective for managing finances. At most, it only costs money to buy a few envelopes.

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How Envelope Budgeting Works

How does envelope budgeting work? Here’s how it works according to several trusted sources:

Create Budget Categories: Figure out your monthly spending categories, like food, transportation, entertainment, bills, etc. You can also create special categories for savings or investments.
Prepare Envelopes: Take some envelopes and label each envelope with the budget category you have created.
Distribute Funds: At the beginning of each month, take out cash. You should do this at the start of a pay period if applicable. Divide the cash according to the budget you have determined. Put cash for each category into the appropriate envelope.
Use Money from Envelopes: When you need to spend money for a particular category, take cash from the corresponding envelope. Try to only use the money that is in that envelope.

You use cash and directly see the money in the envelope decreasing. This makes you naturally more aware of your spending. This helps you avoid overspending.

To make it clearer, let’s look at an illustration of how envelope budgeting works below.

Example Scenario of How Envelope Budgeting Works

Let’s say you have a monthly income of $3,000 after tax. And you want to use the envelope method to manage your finances.

Step 1: Create Monthly Budget Categories

First, we need to decide the monthly spending categories. Here are examples of commonly used categories along with estimated budgets:

Housing (Rent/Mortgage): $800
Utility Bills (Electricity, Water, Gas, Internet): $200
Transportation (Gasoline, Parking, Public Transportation): $250
Food (Grocery): $400
Eating Out (Restaurants/Takeout): $150
Entertainment: $100
Clothing: $50
Health (Medicine, Vitamins): $50
Debt (Credit Card Payments, Loans): $300
Savings: $400
Miscellaneous (Personal Care, Supplies): $100
Total Budget: $2800

The total budget above is $2800. This means you have a surplus of $200 from your income. ($3000 – $2800 = $200). This remaining $200 can be allocated to extra savings, emergency funds, or other categories as needed.

Step 2: Prepare Envelopes and Label Them

Prepare 11 envelopes (according to the number of budget categories above) and label each envelope with the category name, for example:

Envelope for Housing, fill with $800.
Envelope for Utilities, fill with $200.
Envelope for Transportation, fill with $250.
Envelope for Food, fill with $400.
Envelope for Eating Out, fill with $150.
Envelope for Entertainment, fill with $100.
Envelope for Clothing, fill with $50.
Envelope for Health, fill with $50.
Envelope for Debt, fill with $300.
Envelope for Savings, fill with $400.
Envelope for Miscellaneous, fill with $100.

Does the remaining $200 need to be put into an envelope?

Deciding if the remaining $200 needs to be placed in an envelope depends on your purpose for that money. The remaining $200 is part of your income, so it should also be deliberately allocated, not left “floating” without purpose.

Here are some considerations and choices for the remaining $200:

Choice 1: Put it into an Extra Savings or Emergency Fund Envelope

This is a highly recommended choice. If you don’t yet have a strong emergency fund or want to increase your savings. This remaining $200 is very good to put into a “Extra Savings” or “Emergency Fund” envelope.

Extra Savings Envelope: If you have savings goals beyond routine savings ($400 in the earlier example). You can create a special envelope for that purpose. These goals include vacations, a down payment on a house, or investments. You can assign this $200 into it.
Emergency Fund Envelope: An emergency fund is crucial. It provides savings for unexpected events like car repairs. It also covers sudden medical expenses and job loss. If your emergency fund is not yet enough, this $200 be a great addition to the emergency fund envelope.

Choice 2: Put it into Another Underfunded Category Envelope

Check if another budget category in the earlier example is underfunded. Assign some of this $200 to that category’s envelope. Alternatively, you can assign all of the $200 to it. It often is short of funds.

Example: Maybe you feel the $150 budget for “Eating Out” is too small and you want to be more flexible. You add $50 from the remaining $200 to the “Eating Out” envelope.

To start with this first choice, always consider which category most often makes you “break” the budget or feel underfunded.

Choice 3: Create a “Flexible” or “Surprise” Envelope

You can create a special envelope labeled “Flexible” or “Surprise” and put this $200 into it. This envelope can be used for:

Small Unexpected Expenses: For example, there is a sudden friend’s birthday invitation. You also want to buy an interesting book that wasn’t in the routine budget.
Treats for Yourself: Occasionally, you can use money from this envelope for “small treats.” This acts as a form of appreciation for your discipline in managing finances.

Choice 4: No Envelope Needed

The purpose of the remaining $200 does not need physical cash in an envelope. In that case, it doesn’t matter. You don’t need to put it into an envelope.

Example: You want to use this $200 for mutual fund investments or buying stocks online. In this case, you can directly transfer $200 from your salary account to your investment account.

But remember, even if it’s not in a physical envelope, make sure you still record and assign this $200. Be sure to include it for that investment purpose in your budget.

In essence, the remaining $200 should be deliberately allocated and have a clear purpose. Putting it into an envelope is a good way to stay consistent with the envelope budgeting method. Use a savings envelope, emergency fund, another category, or a flexible envelope. This practice ensures every dollar you have works for you.

Choose the choice that best suits your financial goals and priorities. The most important thing is that you have a clear plan for the remaining $200, not just leaving it unmanaged.

Okay, now let’s discuss the third step in the illustration example of envelope budgeting.

Step 3: Use Money from Envelopes According to Category

Throughout the month, use the cash that is in the appropriate envelope. Do this when you need to spend money for daily needs.

For example:

When you go grocery shopping, use money from the Food Envelope.
When you want to watch a movie at the cinema, use money from the Entertainment Envelope.
To pay the electricity bill, use money from the Utilities Envelope.

Try as much as possible to only use the cash that is in each envelope. If the money in a certain category envelope runs out before the end of the month. Then you must stop spending money for that category. Alternatively, find a way to transfer funds from another envelope, if possible and according to priority.

That’s how envelope budgeting works. If there are still any questions, don’t hesitate to ask. Use the comments column below this article.

Now let’s move on to the benefits section of envelope budgeting. Actually, I didn’t want to discuss this, because the earlier explanation has implicitly described various benefits. But to make this article more quality for search engine search intent, this section must be written. Let’s check out the explanation!

Benefits of Envelope Budgeting

What are the benefits of envelope budgeting? Here are some benefits that many people often say:

Increased Spending Awareness: Because you use cash and physically put it into envelopes. You become more aware of where that money is going. You will pay more attention to every deal and think twice before spending money. Because you directly see the cash in the envelope decreasing. This is different from digital transactions which often feel less real. Isn’t that right?
Better Spending Control: The envelope method helps limit spending according to the budget set for each category. For example, when the money in a certain category envelope runs out, you will be more motivated to stop spending. You will stop spending money for that category. Or look for other solutions rather than overspending. This physical limitation is very effective for controlling impulsive spending.
Simple and Easy to Understand: This method is very easy to understand and practice by anyone. Without requiring complicated financial applications or special knowledge about finance. You only need envelopes and cash. This simplicity makes it easy to implement and keep in the long run.
Helps Reduce Debt: Controlling spending and limiting yourself to a budget, you can avoid overspending. Which is often the main cause of debt accumulation. This method helps finances live within their means. And prevents you from relying on credit cards or loans to cover budget shortfalls.
Clear Budget Visualization: Physical envelopes supply a real visual representation of the budget. You can directly see how much money is allocated for each category and how much is left. This visualization helps understand financial conditions more intuitively and make better financial decisions.
Encourages Financial Discipline: The envelope method trains discipline in managing finances. You must create a budget, adhere to that budget, and make responsible financial decisions. This discipline is key to achieving long-term financial goals.
Reduces the Risk of Credit Card Overspending: By using cash, you reduce dependence on credit cards. This helps avoid high credit card interest and the temptation for overspending that often occurs when using credit cards.
Suitable for Financial Learning: This method is very good for teaching basic financial management concepts. Especially for young people or those who are just starting to learn how to manage finances. The use of cash and envelopes provides direct and concrete experience about budgets and spending.
Flexible and Customizable: The envelope method is very flexible. It can be adapted to the needs and lifestyles of each individual. You can decide the budget categories that are most relevant to you. And adjust the amount of funds in each envelope according to your financial priorities.

Honestly, I have tried this envelope budgeting method for 7 months. And as a result, I vacationed in Bali for 1 month.

Okay, that was a discussion of the advantages of using envelope budgeting. Aren’t you curious, for example, are there any disadvantages to this method? Of course there are, but they don’t have bad side effects. What are they? Let’s discuss!

Disadvantages of the Envelope Budgeting Method

So what are the disadvantages of this envelope budgeting method? Anyone know? Here is a list of disadvantages of the envelope budgeting method that are often said by several sources:

Not Practical for Digital Transactions.
Security Risks and Loss of Cash.
Inconvenient and Inefficient.
Difficult to Track and Analyze.
Not Getting Benefits from Credit/Debit Cards.
Requires High Discipline and Consistency.
Not Ideal for Complex Budgets.
Does Not Account for Inflation.
Potential for Family Conflict & Lack of Transparency for Shared Expenses.

But, after I implemented this envelope method, these disadvantages did not bother me at all. What I felt was only in discipline. It is indeed difficult to create a new habit that has never been done before. But that’s only temporary, gradually it becomes a habit. Maybe 7 days is enough to adapt to this method.

My experience is the same as the experience of successful envelope budgeting users who also reported similar experiences. They acknowledged the discipline challenges at the beginning, but the benefits far outweigh the challenges. Many financial bloggers, influencers, and personal finance experts highlight the effectiveness of the envelope method. They acknowledge that the early adaptation is relatively short.

Oh yeah, I just thought of a disadvantage of this envelope method. It’s risky with counterfeit money. For example, change that is put into an envelope with a certain category.

The risk of counterfeit money is a significant disadvantage of the envelope budgeting method. This is especially true because the method relies heavily on physical cash. This is a good point and often overlooked in discussions about this method.

Although there is a risk of counterfeit money, this risk can be minimized with simple preventive measures:

Always Check Change When Receiving It: This is the most important preventive step. When receiving change from a cash deal, take a few seconds to check the money. Do this before putting it in your wallet or envelope. Pay attention to the characteristics of genuine US dollar banknotes (like security threads, watermarks, color-shifting ink, paper texture). If you are in doubt, do not hesitate to ask or ask for the change to be replaced.
Learn the Characteristics of Genuine US Dollar Banknotes: Familiarize yourself with the security features of genuine US Dollar banknotes. You can find this information on the official website of the U.S. Bureau of Engraving and Printing. The United States Secret Service is another reliable source. Other trusted sources that discuss the security of US dollar banknotes are also helpful. This knowledge will help you more quickly and accurately check dollar cash.
Be Careful in Places Prone to Counterfeit Money: Some places or situations are more prone to counterfeit money circulation. Examples include crowded places or very busy traditional markets. Transactions at night or places with dim lighting are also risky. Transactions with street vendors or lesser-known sellers should be approached with caution. In situations like this, be extra careful when receiving change.
Use Digital Transactions for Large Payments (If Possible): When possible, use digital payments for large transactions. This includes debit or credit cards and e-wallets. This will reduce the amount of cash you handle and the risk of receiving counterfeit money. The envelope method does not have to be 100% cash for all transactions.
Check the Money in Envelopes Periodically (Optional): If you are worried, you can periodically check the cash in your envelopes. Especially if you often get large amounts of change. This is cumbersome, but it can give peace of mind.
Report If You Find Counterfeit Money: If you find money that you suspect is counterfeit, do not use it. Avoid using it for transactions. Report your findings to local authorities or the nearest bank in your area in the United States. This is a responsible action to help eradicate the circulation of counterfeit money.

Thankfully, I have never experienced the risk of counterfeit money during the implementation of this envelope budgeting method. Hopefully, it won’t happen.

Alright, we have discussed envelope budgeting in depth. But have you ever wondered, who is the envelope budgeting method suitable for? Curious, right? Let’s discuss!

Who is the Envelope Budgeting Method Suitable For?

The envelope budgeting method is suitable for various groups, especially for those who have certain characteristics or financial goals. Here are some categories of people who will greatly gain from this method:

People Who Have Difficulty Controlling Spending: If you feel you often overspend, have difficulty resisting impulsive purchases. Or confused about where your money goes every month, envelope budgeting can be a very effective solution. The physical limitation of cash in envelopes will help you be more aware and control spending.
People Who Want to Be More Aware of Finances: This method is excellent. It suits those who want to be more hands-on. It helps them to be more connected with their finances. The process of preparing envelopes, filling cash, and using cash from physical envelopes will help boost your awareness. You will become more aware of cash flow in and out.
For People with Short and Medium-Term Financial Goals: Try envelope budgeting for short-term financial goals. This method can also help with medium-term goals. This method helps those with medium-term goals, too. It can help you focus on these goals. It lets you focus on these goals. It can help with tasks like paying off credit card debt. You can also use it to save for a down payment on a house or prepare vacation funds. It also helps you be disciplined in achieving these goals.
People Who Are More Comfortable with Cash: You prefer using cash over digital transactions. This method will feel natural to you. It suits your preferences. You feel more “real” and in control with cash.
Young Couples or Families Who Are Just Starting to Manage Finances Together: Envelope budgeting is a useful tool. It’s beneficial for young couples. It helps them manage their money together. This method also helps new families build healthy financial habits together. This method helps increase transparency, communication, and agreement in household financial management.
Students or Students Who are Learning to Manage Finances: This method is very simple and easy to understand. It is suitable for students who are just starting to learn how to manage their own finances. The use of cash and envelopes provides a concrete and effective learning experience about budgets and spending.
People Who Want to Reduce Credit Card Debt: If you have a problem with credit card debt, consider envelope budgeting. This method can help reduce your dependence on credit cards. You switch to using cash and avoid overspending that often occurs when using credit cards.
People Who Are Looking for a Simple and Uncomplicated Budgeting Method: Envelope budgeting is very simple. It is straightforward compared to complex digital financial applications or software. It does not need sophisticated technology. You only need envelopes and cash. This simplicity makes it easy to implement and keep.
People Who Want to Try a Different Budgeting Approach: You have tried various digital budgeting techniques. They have not worked. Try envelope budgeting. You find this approach different. It is a different approach. If digital strategies feel less effective for you, envelope budgeting can be an interesting choice to try.

But, it is important to remember that envelope budgeting is less ideal for:

People Who Are Fully Accustomed to Digital Transactions: If you are very dependent on digital transactions. You rarely use cash. So, this method feels less practical. Additionally, significant adjustment is required.
People with Very Complex Budgets: If you have a very complex budget, it is less efficient to manage daily. This is especially true if there are many spending categories. Diverse sources of income can also make the envelope method less effective.

Conclusion

In my frugal opinion, the method of saving and managing budget with envelopes is very useful. Especially to get what we want in a short period of time. For example, to buy the latest gadgets, vacation funds and non-large nominal money targets. Just a suggestion, start with 7 days. To get precise information for conscious or unconscious expenses. Know that this method is very suitable for detecting unrecorded and unnoticed expenses.

That’s just my opinion. This article was written based on personal experience and other trusted sources. And I believe envelope system is the most successful method for managing my finances. How about you?

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