These days, it seems like there's a way to budget meant to help every personality type. But have you ever heard of a budgeting method that involves envelopes of cash?
Yes, it may sound old-fashioned, but the key principles can still be applied today for help saving money.
At its core, the envelope method is a monthly budgeting approach that sets limits on spending categories. But for the right person, this method can mean so much more than that.
First, let’s discuss how the system has worked traditionally. Then, we’ll do a reality check and show you how to adopt this approach while taking advantage of online tools.
Subtract all the regular expenses that you can’t pay for in cash like your mortgage/rent, utilities, etc. These expenses will not be part of your cash envelope system.
Divide what’s left into individual spending categories and create separate envelopes for each. Here are a few examples:
Place enough money in each envelope to cover these monthly expenses. We know this may sound crazy, but again, this is the traditional approach and following this process can help you get in the right budgeting mindset.
The goal is to spend exactly what you set aside in each envelope – with the exception of the emergency fund. Once the envelope is empty, there’s no money left to spend for that category – and that's the key to helping you stay within your budget.
If you do need a little bit of extra cash for that category (we’re human, this happens), you can shift excess money from one envelope to another.
Track your spending at the end of every month and see if you have any money left over across all of your categories. You can either roll over what’s left into the next month, or put it into a savings account.
Decide if you need to change the limits or alter the categories to better fit your spending patterns.
While the cash envelope budgeting system has an easy-to-understand approach, the envelope budgeting system can be time-consuming and dated. On top of that, there’s a number of reasons why many of us don't use cash for purchases:
Given all of this, some budgeting apps can provide the same philosophical value of the money envelope system, but for a cashless budgeter.
Apps could automatically categorize your transactions and offer weekly budgeting in the following areas:
You can also see how much you spend at a particular merchant over certain time periods, compare your income against your spending, cancel subscriptions and check your credit score.
The envelope budgeting system comes down to only spending what you have. And thankfully, you don’t actually need to put cash into envelopes to adopt this philosophy.
For today’s consumer, online tools can help you budget with the same mindset – and manage your finances holistically – with far less hassle.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.