# What is envelope budgeting

## What is the most effective way to save? [closed]

"Envelope Budgeting" is pretty straightforward. It's simple enough that you can teach kids and flexible enough that you can use it as an adult.

The general idea is that you take your cash (no bank accounts in the simple version) and put it in envelopes marked for what it is supposed to be for. For example, you get paid, you cash your paycheck, and you put \$ 100 in an envelope that says groceries.

Now when you go out to eat, you get the money out of your grocery envelope and spend it on groceries.

If your envelope is empty, you will go hungry.

In the simple version you have envelopes for things like "food", "candy", "toys", "games". etc. (The easy version is usually taught to children.) So you want a \$ 60 game and your game envelope is only \$ 5. Well you can't get the game. You need to add more money to the game envelope. You need to eat so that you can invest money there, but you may not need toys. So you can divert some incoming money from toys to games. Sure, it will be a while before it hits \$ 60, but now, with simple kid-friendly calculations, you can see how long and more importantly, you can make decisions about what is more important. Candy or toys?

In the adult version, things are similar. We just have more envelopes. We have rent, car payments, gas, food, electricity.

Then we need some envelopes for "savings" and "retirement". Etc.

Now when you get your paycheck, prioritize your money and stuff it in the envelopes. How much you put in each envelope is easy. Enough to pay for the thing. Savings and retirement serve different goals. They want to save \$ 6,000. Just like this game in the kids version, you won't get there all at once. But you can see and make decisions about what is most important. You want \$ 1,000,000 to retire. Sure, but it will take a while to fill this envelope.

At its core are the following important parts:

• You only count the money you have in hand. No future money or expected money of any kind.
• You are only spending money from the correct envelope. Your rental envelope is not enough. Then you will become homeless. Thankfully, your car envelope is good so you can at least live in your car.
• You decide what is more important when you put money in the envelope. The rental envelope will be a bit easy, money will distract from the savings envelope.
• You don't use money from one envelope to cover another. Only when you put money in envelopes can you decide that something is more important.

Let me explain the rental example as it is the weirdest one.

You will get \$ 500 per week and will need \$ 1000 for the rental.

• Week 1 - \$ 500 in rental envelope
• Week 2 - \$ 500 Rental Envelope <- You paid your rent next month
• Week 3 - \$ 500 in other envelopes
• Week 4 - \$ 500 in other envelopes

This means that you are spending from your envelopes. In weeks 1 and 2, you will spend the last months in weeks 3 and 4.

They do NOT:

• Week 1 - \$ 250 in rental envelope
• Week 2 - \$ 250 in rental envelope
• Week 3 - \$ 250 in rental envelope
• Week 4 - USD 250 in rental envelope <- Rent paid here for the next few months.

This is important because if you lose your paycheck in week 3 or 4, you will be homeless.

After all, you generally put things in the savings envelope. And you want to hit a savings goal of 6 months on your average paycheck. Once you achieve this goal, you are in good shape and losing your job does not mean you are homeless. You can only draw from savings.

In using these envelopes it is important to understand that the only time you decide what is more important is when you put money in, not when you take money out, and that you are only working with the money that you have today (in your hand ). What do you think you will get tomorrow

Money in the bank can be split into virtual envelopes. Money in savings can be in any vehicle, but in general you want a short-term emergency envelope (savings account) and a long-term envelope (e.g., CDs).

Take a look at YNAB.com for free lessons on how to use their software to manage a handling system.

And I know there will be a comment section.

Rent against the homeless is a real example. For example, you shouldn't take money out of the grocery envelope to cover rent. This may seem silly, but if you do, you made bad decisions deciding where the money goes. Use the emergency fund envelope to cover the rent and spend less money on groceries next time. It is this "rule" that makes envelope budgeting good. You may be homeless, but you can eat, drive to work, put gas in your car, and pay your bills. Usually taking money out of different envelopes creates a spiral of trying to do the sensible thing, but you end up doing worse.

Migrating to envelope budgeting (in the narrower sense) is difficult. The best way I've taught people is to envelope budget only an increasing portion of their income until their envelopes are full enough for a month. That means you may only budget 10% of your income initially. But unless your situation is such that you can cover all of your bills with one paycheck, you cannot transition without breaking the "don't take money from other envelopes" rules.

### a CVn

"This is important because if you lose your paycheck in week 3 or 4, you will be homeless." But the first variant magically saves you if you lose your income in week 2? Somehow I don't see how that works. A 100% rigid budgeting almost never works in the long run. Losing your only source of income is certainly one scenario where an emergency fund comes in handy. You mentioned this briefly with the envelope "savings", but if you lose your job and have to pay the rent (or mortgage or any roof over your head) this is not a good time to use the emergency fund I don't know what could be.

### coteyr

Sorry, that may not have been clear. This is the perfect time to start taking advantage of the ER Fund. However, it is not time to take advantage of the Food Fund. Homeless and full is better than homeless and hungry.

### coteyr

If you really get into this situation, your quickest route to normalcy is to keep paying your bills on time. You think it will be difficult to get back on your feet if you can't pay the rent and get kicked out. If the electricity company, water company, oil / gas company, telephone company, and auto insurance company come to you to pay your bill plus late fees plus interest and in some cases legal costs, give it a try and refuse to service you until you do Pay your bills. Better pay your bills and crash on a friend's couch.

### coteyr

At least when you get back to work, all you have to worry about is deposits, not bills.