Envelope Budgeting: Part 1 - Allocating Your Money

Hey, how's your budget coming along? Are you saving as much as you'd like to? Did you have to make any tough calls and cut out some wants so you can afford your needs? For me, I think making the budget went well, and I feel like I'm on the right track, but I also don't feel like I have much control over where my money is going. I feel like it'd be easier for me if I could see my money and where I was spending it. But keeping a bunch of loose bills everywhere is a great way to lose all of it. So I need some place safe to keep it all together. Oh, I know. I'll use envelopes. I think I just invented a whole new style of budgeting. I'll call it envelope budgeting. Okay, you caught me. I didn't invent envelope budgeting. In fact, envelope budgeting is one of the world's oldest budgeting methods. It's been around since before modern technology and even before electricity. I remember my grandpa saving money in envelopes back when I was a kid, and he was born in like the stone age. Hey, grandpa. In this video, you're going to learn exactly how envelope budgeting works and why my grandpa was a financial genius. Envelope budgeting sounds simple. Stick a bunch of money into an envelope and boom, you're rich. But in reality, it doesn't quite work like that. Instead, there's lots of different envelopes, and each one of them has a small amount of cash inside of it. Each envelope will be labeled with a specific expense, and the money that's within that envelope will be your fund for that purpose. Rent fund, gaming fund, shopping fund. That one's my favorite. Knowing the difference between needs and wants is just as important in envelope budgeting as it is in the 50-30-20 rule. So let's quickly go over the difference. If you own a car, legally, you need to have car insurance or else you'll lose your car. But you don't need a skateboard. I know, I know, they're super fun, but they're not important or necessary for survival or supporting yourself, so they're just a want. If you'd like a more in-depth refresher on the check out our lesson on the 50-30-20 rule. Now, expenses can be fixed or variable, and they can be needs or wants. Together, that creates four different categories of expenses that we need to keep track of, and we're going to have to treat them a little differently in envelope budgeting, and in most forms of budgeting, really. First, we have to allocate money towards our needs, those expenses that we have to pay in order to survive and obey the law, like car insurance. For fixed expense needs, that's pretty simple. You know how much money you're going to have to pay, so just take that amount, put it into the envelope, and pay it when it's due. Variable expenses, of course, are a bit harder to predict, but you need to be able to cover for them when they're due. They are needs, after all, right? To make sure that you don't have too little into your variable needs envelopes, we're always going to overestimate the amount we need to pay. For example, if you know that your water bill is usually around $200 a month, put $250 into the envelope. That way, you'll always have enough money to cover it if your water bill is a little high this month. A great advantage to overestimating is that if there's still money left in the envelope after you pay your bill, you can take that money and put it into a want or your savings. Once we're done with our needs, now we can move on to our wants. Fixed wants are very similar to fixed needs. You know how much you need to pay for them, so just calculate the total, put it in the envelope, pay it when it's due. Once these three categories of envelope are done, now we can move on to our variable wants. These are the expenses that are hard to predict, but it doesn't really matter if we do it accurately. Just allocate a reasonable amount to put in every month for things like fast food and books. And always remember to use cost-saving measures, like going to the library to borrow books instead of buying new ones for yourself. The difficult part is actually sticking to these amounts. Whatever you put into your fast food envelope is all you can eat, so to speak. If you blow it all at once, that's it for your fast food for the month and you have to resist the urge to take money from a different envelope. It's also important to have a savings envelope too, but this one's going to work a little differently from the other envelopes. First, as soon as you cash out your paycheck at the end of each month, take whatever amount you want to put into savings and put it into the envelope. I'm going to use the 50-30-20 rules recommendation of 20% of my income. Then, at the end of each month, whatever you have left over from your other envelopes gets added into your savings too. That's what's so awesome about envelope budgeting. You can't overspend, but whenever you underspend, you get that much money to put into your savings. Now, envelope budgeting is great for people with a lot of cash on them, but for a lot of us, that just isn't the case. How do you envelope budget when all of your money is in a bank? Do you just put debit cards in the envelope? No, of course not. Computers and electronic money have completely changed budgeting. Most people just don't have physical cash to physically put into envelopes, to physically take out, to physically use. So, just like how our money is represented digitally, our envelopes will be represented digitally as well using a spreadsheet. In our next video, we're going to go over how to mimic envelope budgeting by using a spreadsheet. Hopefully, this will help us save some money on envelopes. See you then.