Envelope budgeting is a common method of budgeting in personal finance. It has been recently popularized by financial guru Dave Ramsey. The basic idea is to use a series of envelopes full of cash to separate your expenses and keep your budget on track. Here are the basic steps.
Create a Budget
Go through your monthly expenses and determine how much you can spend in each category. Make sure that your total expenses do not exceed your income.
Create an Envelope for Each Category
Take a stack of regular envelopes and write the name of a budget category on each envelope. Then place the budgeted amount of cash in each envelope at the beginning of each month.
Rules of the Game
You must use the envelope to pay for any expense in that category throughout the month--no checks or credit cards allowed! It is usually easiest to carry the common envelopes with you in our pocket or purse. That way you will remember to use it if you drop in at a grocery store or a clothing store. For items that do not fluctuate at all, you do not have to use an envelope. For instance, your mortgage or rent payment is likely the same each month. It should definitely be part of your budget, but it does not need an envelope, because it doesn't change. You will never be tempted to overspend and pay your landlord too much for the month!
Track Your Progress
It is imperative to keep track of your progress. You will likely need to adjust your budget each month. You will learn over time how to stay within your allotted budget. Just remember that each month you show financial discipline is one month that gets you closer to your financial goals. Keep your financial goals at the forefront of your mind when it gets tough to stick to the budget. Think about being debt free or being able to take a dream vacation.