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Don’t know where to begin with using the envelope system for budgeting, Here’s how to fix it!

By estherbangura | Budgeting

Nov 25

Are you in a budgeting mess and don’t know where to start! It’s ok, We’ve got you. If you’re new to budgeting, you may want to begin with using the envelope system. It’s an old fashion way of budgeting, but many people use it and find it helpful. This is mainly because cash is harder to spend than plastic (bank card).


“The Envelope System is an excellent way of learning how to stop using credit and debit cards, for the most part.”
— SAID, BOSS OF MY MONEY!

Your way may not be my way

There are different extremes to Envelope System Budgeting. Some people only use cash and envelope system to pay all of their bills. Others will use direct debit, standing order and debit cards to only pay for specific items. These could be rent, mortgage, council tax, utility and phone bills etc. They then use cash for food shopping, clothing, car servicing, fun, children miscellaneous etc. Whichever method you choose, the key is that you make it easy and it works for you. It may also be a good idea to try different budgeting methods. Whether it’s a budgeting app, spreadsheet, envelope system or pen, paper and calculator, try until you find what’s right for you. I have personally used the envelope system when going on holiday so I don’t overspend. What’s in the envelope is what we use. I will still have my bank card but will only use that in an emergency. Particularly flight delays, emergencies or medical treatment.

Fundamental principles

Let's get to it. There are three fundamental principles to Envelope System Budgeting. The first principle of an Envelope System is assigning a job to every penny. The second principle is that you assign an envelope to every bill but you can choose to pay by cash. Especially for small expenses -fill those envelopes with money. For the larger expenses you would pay via direct debit, standing order or using your bank card. The third is that you must keep the envelopes in a safe and secure place, preferably a safe fire storage.

“Envelope budgeting is a brilliant way for people who want to physically see what they spend on and prefer using cash”.
— SAID, BOSS OF MY MONEY!

 10 steps to Happy Envelope Budgeting

  • 1
    Sit down before you get paid and create a list all your priority bills, savings goals, debts and investment (link to another article).
  • 2
    Assign a jo​​​​b to every penny- This is known as getting your money to work for you!
  • 3
    Write on each envelope the bill, savings goals, type of debt and the amount.
  • 4
    Once you get paid or get the money to fill up each envelope with the exact amount in cash.
  • 5
    As a minimum pay your rent, council tax, TV licence (see if you even need one), utilities, food and transport. Then debts and savings. I prefer to pay myself first and use the 'Pay My Self First' method to do my monthly budget. (you can download our free Master your budget work sheet as a PDF download).
  • 6
    Use only the amount allocated in that envelop for that expense. Once you have used up- that’s it. Don’t take out money from your food shopping to pay for your Amazon shopping.
  • 7
    You may find that you are not assigning enough in one envelope and assigning too much in another. In that case you can adjust your envelopes month by month. If you have money left over after you have budgeted- pay extra towards your, emergency fund, savings, debt, loans and pensions etc.
  • 8
    For online spending you can create an envelope that says £50 online clothes shopping.  Even if you are paying by card you will still have an envelope for that category.
  • 9
    As you spend in that category- you would write down on the envelope how much you spent/have left. 
  • 10
    You can monitor your progress by paying all your bills on time. Having money left over in the envelopes, and savings goals envelope increasing. Also debts envelope becoming £0.00 balance and investment envelope growing. As you make progress, you will see that your debt envelopes and possibly bills envelope will become less as you manage your money better.

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It’s not going well, do something about it!

If you are short on covering you priority bills and at least minimum payments on your debts, then you should think about cutting down on expenses. Increase your income by getting a second job, working overtime or selling things you don’t use. You should also consider getting professional help, contact the citizens advice bureau and see if you are entitled to any social welfare.

What are you trading?

The envelope system causes you to be a lot more aware of your spending. When you use cash, there is a physical transaction that happens with your money and the item you are purchasing. When you use a bank card or pay online- you don't feel that physical trade as much. Particularly because you just tap a card and don’t really experience that transaction happening, consequently spending more.

An example of what an envelope system looks like.

I want to use £200 for food shopping this month. I will put £200 in an envelope and title it Food. I get paid and add £200 into this envelope. I can only use this money for food and if I have money left over by the end of that pay period- I will add it to my next month's food shopping. I may even decide to reduce the budget if each month I am not spending up to that amount on food shopping. Let’s say I have £30 left each month from my food budget. I will either reduce my food budget to £170 and put the £30 towards debts, savings. I could also put it towards other bills where I may not be assigning enough to. These could be non priority bills such as car servicing, clothing etc.

Happy Budgeting!!

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