How to Save Money Using Envelopes

*This post has been reviewed by an Illinois Registered CPA. However, when making important financial decisions, it's best to speak with your financial advisor.

Last Updated on July 16, 2022

Learn How to Save Money Using Envelopes

If you’re looking for ways to save money, you might have come across the envelope system. This is not a unique strategy. There are, in fact, different versions of this budgeting method. There are also similar ones under the name ‘the jar system’. At their core, all these strategies have something in common. They allow you to create separate categories of expenses. For example, you can create an envelope for rent, bills, or even online shopping like Amazon.

Creating envelopes for your budgeting strategy entails multiple benefits. It helps you limit your spending, set and focus on priorities, and achieve your savings goals. Learn how to save money using envelopes and explore the advantages of this strategy.

How to Budget

Before you start looking into budgeting strategies, learn more about budgeting itself. This operation means splitting your income into different expenses. There are three basic steps you need to take to budget:

• Calculating your income.
• Calculating your expenses.
• Setting a spending limit for each expense.

1. Calculate your total income.

If you have a fixed salary, this is easy. If you have different sources of income, add them all to your monthly budget. If you know you’ll get a bonus, add that too, even if it’s not a recurrent income you can count on. Budgeting is a flexible process. Try to do it at the beginning of each month for the current month. You can also do it at the end of the month for the next 30 days.

Here is an example of a simple budget plan:

Total monthly budget	$4,000
Income source 1: full-time job salary	$3,500
Income source 2: side job	$500
Total monthly expenses	$3,500
Rent & bills	$1,900
Groceries, clothes, other expenses:	$1,600
Amount you can put aside:	$500

Your budget also depends on when you get paid. Based on that day, set your financial goals and priorities for the following weeks. If you don’t have a fixed income but several revenue sources, include them all. You might work as a freelancer. In this case, your budget fluctuates. To estimate your monthly income, calculate the average from the past three or four months.

2. Calculate your expenses

The second step of the budgeting process is determining your expenses. You’ll need to spend more time here. You will also need to write everything down. There are two ways to go about it. One is to use broad expenses categories, for example:

• Utility bills
• Rent
• Grocery
• Gas
• Non-essential expenses

The second option is to go even more in-depth. Divide each one of the major categories into subcategories. Let’s take bills, for example. Here, you would have:

• Electricity
• Gas
• Water
• Cable
• Phone

Establishing subcategories helps you be more accurate. You need to think of every single expense when setting a budget anyhow. Yet, some categories, such as groceries, are harder to split. Here, you will need to think of your average grocery spending per week. Then, you can multiply it by four. You will get the approximate budget you need for your monthly grocery spending.

3. Assign funds to each expense category

Budgeting comes down to a careful analysis of your income vs. your spending. For each expense you have, you need a predetermined budget. By only using a fixed budget for each type of expenditure, you avoid frivolous spending. This is the main goal of budgeting. It helps you be more aware of your spending habits. It also helps you live within your means and even save money.

The envelope method is an effective budgeting strategy. It usually involves allocating all your funds to a specific purpose. One of these goals is to save money. For this reason, you will have a separate ‘savings’ category in your budget. The ‘savings’ envelope will be one of your priorities.

Why Is It Important to Determine Your Budget?

You can use the envelope method without an accurate budget. Yet, the effort likely won’t be effective. Without proper budgeting, you can’t develop a concrete and realistic plan.

Your goal might be to save $2,000 per month. But if your salary is $5,000 and your rent is $1,500, this is hard. Based on this goal, you would only have $1,500 left after saving money and paying rent. If you live with someone else, you can make both ends meet. Alone, this might be impossible. For this reason, it’s important to calculate your budget. Then, compare it to your expenses. Determine the amount you could save each month.

How to Set SMART Budgeting Goals

The goal has to be realistic. Speaking of which, you can use the SMART approach. This is a method for setting achievable goals. Smart goals can adapt to any area, including saving money. This is what the acronym SMART stands for:

• Specific – Make sure you have a clear savings goal in mind. For example, you might save money for college or move out. The clearer the goal, the easier to stick to a budgeting plan.
• Measurable – When it comes to finances, this is easy to track. You just have to keep an eye on your savings account balance. The measure of your success is how much you manage to save there.
• Achievable – This is where you have to be realistic and rational. Setting financial goals you cannot achieve will only lead to negative outcomes. You risk giving up on your savings goals altogether. You also risk making too many compromises that hurt your comfort and even your finances.
  • For example, you shouldn’t avoid paying your bills in time to save more money. This will only trigger penalties. Use the half-payment method if you need to, and always make sure you pay them. Set achievable savings goals based on your income. If you can save 20-30% of your salary, that’s great. If not, settle for less. Try to save only 10%. What matters the most is not the amount. Commitment to saving each month is more important.
• Realistic – How do you know what a realistic savings goal looks like? Find out the answer by budgeting. You need to deduct your necessary monthly expenses from your income. What you get is your available spending budget. From this amount, establish the percentage you’ll allocate to your savings.
• Timely – In most areas where smart goals are used, time is essential. An employee has a limited time to finish a project. A student has a limited time to gain and prove new competencies. Time is relative when it comes to your savings goals. If you save money for retirement or an emergency fund, you might not feel pressure.

You just have to make sure you contribute to your savings account each month. But if you save for a car loan or mortgage, it’s different. You might want to move out as fast as you can. You might also need a car urgently for your new job. In situations like these, set a deadline for your savings goal. Then, adjust your expenses accordingly. You might have to reduce them to meet your goal in due time.

Creating smart savings goals will help you achieve them faster. These goals are easy to set and track. They help you become more focused on whatever you want to achieve.

How to Save Money with Envelopes Budgeting Strategies

Envelopes are an umbrella term when we talk about budgeting strategies. There are different budgeting methods that use envelopes. You can use paper envelopes or digital ones. You can also use jars instead or any other place where you can store cash. There are two ways to apply the envelopes method:

• By using cash
• By using digital envelopes

What this budgeting strategy suggests is to use envelopes for different expenses. These are basically the budget categories we mentioned earlier.

Using Paper Envelopes

If you want to use the classic method, get paper envelopes. First, budget and divide your available money. Then, you know how much to put in each envelope. Afterward, write the name down on each envelope. For example, you could have the following envelopes:

• Groceries
• Gas
• Monthly subscriptions
• Clothes
• Dining out
• Entertainment
• Savings

There are certain expenses you can’t tackle with paper envelopes. You might have loans to repay, mortgages, bills, and subscriptions. All these may require money transfers. You will not be able to create a paper envelope for them.

However, you need to take them into account when you budget. So, don’t forget to include these expenses in your plan. Deduct all these expenses you pay for via money transfer. Then, you can use the rest of your budget as cash.

Here is an example of how you could divide a $2,400 budget into several envelopes/expenses:

Envelope	Allocated amount/month
Groceries	$900
Gas	$500
Monthly subscriptions	$50
Clothes	$200
Eating out	$250
Entertainment	$200
Savings	$300
Available monthly budget: $2,400

Using Digital Envelopes

Digital envelopes work the same. But they are separate accounts in a bank, not paper envelopes. When you get your salary, refill these envelopes by transferring cash. You will probably stick to more or less the same budget limit for a while.

If you start earning more, adjust your spending. For example, you can put more money into the entertainment category. But you could also take advantage to save more. The whole purpose of this system is not only to save money each month. It is also to make you more aware of your spending habits. Saving money in envelopes entails four major advantages. This method helps you:

• Avoid frivolous spending.
• Track your monthly expenses.
• Realize what drains your budget.
• Live within your means.

For the method to accomplish all these goals, you have to commit to it. You should use it each month. Otherwise, it won’t yield great results. Another reason why people use envelopes is they can focus on separate expense categories. This way, it’s easier to set and achieve goals such as saving money for a car.

Sticking to the Budgeting Envelopes Strategy

How often did you ask yourself, ‘why can’t I save money’? The reason might be unplanned spending. This can lead to credit card debt. This enemy can prevent you from fixing your credit as fast as you can and getting a loan when in need. When you spend on an impulse, you don’t count your money. You just buy what you see and like.

The envelope system prevents you from doing this. You only have a fixed amount to spend on each budget category. The aim is to stop spending once the money in each envelope is gone.

If you finish your ‘entertainment’ funds in just one week, stop there. Wait for the next paycheck to refill that envelope. Don’t take money from the ‘groceries’ envelope to go out with friends. More importantly, don’t tap into your savings account. This should be off-limits. To make sure you don’t touch your savings, creating a separate savings account can be a good idea.

The Advantages of the Digital Envelopes System

A modern way to apply the envelope method is the digital version. With the digital envelopes budgeting method, you don’t use paper envelopes. You rely on digital envelopes, which are different accounts. You can set them up using internet banking tools or budgeting apps.

Learn how to use digital envelopes in our GoodBudget App review. Digital envelopes are more practical. You don’t have to carry cash on you all the time. They are a lot safer. All your money stays in the bank. With the help of a budgeting app or via internet banking, you just have to track your spending.

Alternatives to the Envelopes Budget System

If you were wondering how to save money using envelopes, you have the answer. But there are different other budgeting and saving strategies too. Some of the most popular ones are:

• The 50-30-20 budget method: You save 20% of your monthly income.
• The money jars method: you divide your income into six categories (essentials, education, entertainment, savings, big purchases, charity).
• The priority-based budget method: Prioritize whatever spending category is more important for you, for example, education, or a house down payment.
• The zero-based budgeting method: Allocate a purpose (spending category) to each dollar.
• The 80/20 budget: Keep 80% of your income for expenses and the rest for savings.

FAQs

How can I save money with 100 envelopes?

There is a budgeting strategy called the 100 Envelopes Challenge. It aims to help you save $5,050 in 100 days. Here is how you apply this strategy:

• Get 100 envelopes.
• Label them with a corresponding number from 1 to 100.
• Place all these envelopes in a container.
• Every day, pull out one of them. Put inside the amount of money written on the envelope.

This is how you would get to a total of $5,050 in 100 days.

How can I save money with envelopes fast?

To save money with envelopes fast, you need to calculate your budget. Be as accurate as you can. Take into account all your expenses and stick to your savings goal.

Do I need to use paper envelopes for the envelope budgeting strategy?

You don’t have to use paper envelopes. Nowadays, you can rely on digital envelopes. These are different bank accounts. You can name them according to each expense category. To track your spending, use internet banking tools. Any bank offers them these days. You can also use budgeting apps such as Mvelopes.