You know, sometimes in a world with all the
technological marvels that we have it’s interesting to see how the simpler, old-time, tried and
tested way of doing things still seem to work as well, if not a little better in some cases,
than the new stuff. Hey everyone, Daniel here and welcome to Next
Level Life a channel where you can learn about Investing, debt, retirement, and many other
general financial education videos because the school’s aren’t going to do it for us. So if any of those topics sound interesting
to you or if you want to learn how to better handle your money and have more financial
freedom be sure to hit that subscribe button and the bell next to my name to be notified
every time I upload a video. Today, as you can no doubt tell by the title
of the video, I’m getting back to my series on the different methods of budgeting by taking
a look at one of the oldest and most well-known budgeting strategies… the envelope method. If you’re new to the channel, or if you just
want to check out some of the other budgeting methods that I’ve already covered I’ve left
a link to my budgeting playlist in the description below. But in today’s video, I’m going to be going
over what the envelope method is, as well as who I think it would work best for, and
talk about how it can fail. So with that out of the way, let’s get started. WHAT IS IT?:
So what is the envelope method? The envelope method also sometimes known as
the cash-only budget or even the clip system if you follow Rachel Cruze is just a method
of budgeting where you keep cash tucked away in envelopes that are labeled for specific
spending categories such as groceries, restaurants, entertainment, gas, and clothing. This budgeting system works by forcing you
to allocate certain portions of your income for these variable expenses. You’ll notice that I did not include rent
or mortgage payments or Insurance or even cell phone bills in that earlier list. And that’s because those expenses are usually
a lot easier to predict and are a lot more stable. So most people using the envelope method do
not take out the cash for those categories (they often have them paid automatically). And that’s fine because the goal of the
envelope method is to just control spending. It’s by no means an exhaustive budgeting
strategy. This isn’t the zero-sum budget after all. So with that being said, how does the envelope
method actually work? Let’s take a look at the steps. Step 1 to using the envelope method is to
create a budget because the envelope method in and of itself is not really a full budget
as I said it’s a way to control spending in areas that usually tend to break the budget
for you. The category that breaks my budget the most
is food so I’m going to be using that as an example in this video but the categories that
give you the most issues may be entirely different. So you start by creating a budget that reflects
your Current financial situation. It won’t be perfect and you’ll need to adjust
as you go on but that’s okay just do the best you can. Step 2 is where you separate your expenses
because expenses like a mortgage payment or rent are usually pretty much the same from
month to month whereas things like entertainment expenses or food can vary pretty wildly and
those kinds of variable expenses that the envelope method tries to control. Once you’ve done that you move on to step
3 which is where you divide your spending into categories such as food, gas, clothing,
entertainment and any other categories that apply to your situation. Step 4 is to create an envelope for each of
those categories you just listed and fill them with the money you’ve allotted into that
particular category or just indicate on the envelope if you haven’t been paid yet the
amount that you’re going to spend in that category. So let’s say you’ve budgeted $500 a month
for groceries, but you don’t actually have $500 lying around right now to put in that
envelope. That’s okay you can still use the envelope
method, just write down $500 on that envelope so you know how much you’ve budgeted for the
month and then when you get your first paycheck you take $250 from your bank account (assuming
of course that you’re paid twice a month) and put that cash into the food envelope. When you get your second paycheck you do the
same thing again take $250 out of your bank account and put it in that envelope that’s
your $500 food budget for the month. You also do this for all the other variable
categories that you want to control your spending in. Step 5, of course, is to spend as the month
goes along using money from the appropriate envelopes and only the appropriate envelopes
mind you this budget is not going to work if you start shifting money between envelopes. And I should clarify that by saying it’s okay
to adjust your budget as you’re going along because again you’re not going to get it perfect
right off the bat, but you don’t want to be taking money out of the food budget in order
to buy that nice pair of jeans that you saw because then you’re going to run out of food
money. Or you’re going to have to bring money from
a different envelope into the food envelope and then you’re going to run out of money
in that category and eventually it’s just an endless cycle and you’re not actually controlling
your spending. Which kind of defeats the purpose of using
this method. Moving along step 6 is to put any leftover
money you might have either into savings or use it to pay down any debt you might have
or even roll it over into next month envelope. This is something that I did when I was using
the envelope method, because as I said food was a really difficult category for me to
control my spending in. So what I would do is I would roll over any
money that I had left over in my food envelope into the next month so I had a little bit
of a buffer in case I slipped up and overspent one month. That way I wouldn’t feel as bad about it because
I still had the money in the envelope but I also kept a tally of how much I was spending
each month in food on the front of the envelope. And even though I had extra money after the
first few months in that envelope I tried my best to stick to the original amount that
I budgeted. Like I said this made it a lot easier for
me to not get too discouraged or stressed out if I slipped up one month but also because
I kept a tally of how much I was spending helped me to control my spending in the food
category. Finally step 7 is to refill the envelopes
at the end of the month and do it all over again. WHO SHOULD USE IT?:
So who does this method work best for? Well in my opinion it would probably work
best for those who, similar to me when I was getting out of college and just starting to
make my way in the world, tend to overspend in those variable categories like food or
entertainment because the whole goal of this method is to create a system that helps you
to keep your spending under control. A couple of things to keep in mind though
is as I’ve already said don’t be afraid to tweak your category amounts over the first
few months until you arrive at numbers that work for you because it’s very unlikely that
you’re going to get the numbers all correct on the first try, I certainly didn’t. Another thing that I found really helped me
was to reward myself when I did come in under budget. Like I said food was the toughest category
for me personally to control so whenever I came in under budget I rewarded myself by
going out to dinner and extra time that next month. WHY IT CAN FAIL:
And I think was something like the envelope method those are very important things to
keep in mind because it can very easily fail if you allow yourself to get too discouraged
or beat yourself up for slipping up one month or if you start borrowing from other envelopes
to keep up with another category. If you think that this kind of thing will
be a consistent problem for you then you may want to try a different budgeting method. Thankfully, there are a ton of other ones
out there and I will be continuing to cover as many of them as I can as we go forward. CLOSE:
So that was the envelope method. I know that this was a little different from
my other videos and it didn’t have a ton of numbers put to it, but hopefully, some
of you found some value in it. But that’ll do it for me today once again
if you enjoyed this video be sure to subscribe and hit that Bell next to my name so that
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