The Envelope System: simple yet very effective way to budget your money
The Envelope System: simple but very effective way to budget your money
I remember my officemate and I were going to the ATM right after we received our pay.
She saw me holding my whole month’s salary.
She curiously asked me “Where will you spend your salary?”
Upon seeing her curios reaction, I told her about the budgeting system that I have and how it helped me manage my finances.
I also shared with her that I attended many trainings and seminars in Singapore regarding personal finance.
One of the most basic things that I have done and it has proven to be a very effective way to budget and plan my finances is using the “Envelope System”
Here’s what I did while I was working in Singapore, the moment I received my monthly salary.
- I would go to the ATM and withdraw all my money.
- I would then allocate the money to the envelopes that I have.
- I pay myself first and use the Formula, Salary – Savings = Expense
How to do the envelope system?
- Create a budget
- You have to know your cash flow or how much money is coming in (earnings) and how much money is going out (expenses)
- Start by creating a budget for the whole month (this will depend your salary being paid once or twice a month)
- Divide your spending into clusters
- Check your budget, and divide it into the following examples: food, gas, clothing, entertainment, etc.
- Then create an envelope for each category. I use recycled envelopes and just label it directly.
- Here are my actual categories
- Funds for Stock Market Investing, UITF, MF, Insurance and Savings
- Remittance (fixed amount monthly)
- Rent, Transportation allowance, Food expenses, Phone & Electricity bills
- Funds for Future business
- Here are my actual categories
- Fill your envelopes
Fill each envelope with the money that you’ve allocated for each category.
Spend until the money is gone
- Pay for your purchases out of the appropriate envelopes – using the Investment envelope for Stock Market Investing, UITF, MF, Insurance and Savings
- Funds for Future business envelope for money allocated for my future business – When you have spent the money in an envelope, don’t use money that’s from another envelope. You have to follow your budget plan. Discipline is needed for this one.
- Put any leftover money into savings
Even if you have an envelope for savings, feel free to add money left over from the other envelopes to your savings if there is any.
- Restock again the next time you receive your salary
Fill the envelopes the same way as the previous month, and start again.
- List down how much your transportation, food and other expenses monthly so you could allocate funds for it.
- Be frugal but reward yourself as well. You can allocate a small percentage of your money for entertainment. I use 10% of my salary for entertainment.
- Other people use Alkansya, Microsoft excel spreadsheet or phone apps. Use whichever your comfortable with.
Do this monthly and you will see big improvements in your budgeting and financial planning.
This is a very simple technique but it made my investments and savings grow over time. By the way, budgeting should also be done by both partners if in a relationship or married.
We all should know how to handle our money to be financially free.
Try it and send me a message, if it works for you 🙂
If you want to know and learn more on how to manage your finances then subscribe to my blog Super OFW Investor and feel free to share and comment below.