Tired of Overspending? Try the Envelope Method!

Did you know the 50-30-20 method of budgeting isn’t the only budget in town? (Don’t get us wrong, we still love it.) But you may also want to know about the envelope method for budgeting. It allows you to group your money according to your goals and expenses, with actual envelopes if you want, and it typically substitutes cash—yes, real cash—for many of your monthly expenses.If you don’t want to use cash, however,  Stash has a tool that can let you use the envelope method virtually. It’s called partitions.

Read on and we’ll describe the envelope method in detail.

Jargon Hack.

What is a budget?

Budget

An estimate of your income and expenses for the month or year, used to plan your financial life.

Find out

Tactics and considerations:

• When creating a budget of any kind, it’s important to know what your net income
  is. It’s important because it’s essentially what you have to live on each month.
• Next, tally your monthly expenses. You may need a pencil and paper to track everything, or a spreadsheet.
• Assign your spending categories. With the 50-30-20 budget, we use fixed expenses, variable expenses and savings to create three budget categories.
• The envelope method can help most with variable expenses, the ones that you can change from month to month.
• Consideration: You won’t pay ongoing fixed expenses such as cable, phone, and student loans with your envelope cash. Continue paying those bills online, by check, or by whatever your chosen method is.  But you’ll have to account for those expenses in your total budget, and separate them from variable expenses, for which you’ll use cash.

How to use this method:

• Assign categories to your variable expenses. Categories could include things such as groceries, personal care items, entertainment, household expenses, and savings.
• Next, grab some envelopes, and write a category on each envelope.
• When you get paid, put a predetermined amount of money in each envelope.
• Before you go grocery shopping, or to the movies, or out to dinner with friends, take some cash from the corresponding envelope. What’s in each envelope is what you have to spend until the next time you get paid. And as you see the cash disappearing, you’re likely to get more careful about spending.
• You won’t be whipping out your credit card or debit card if there’s a shortfall. Actually, consider leaving your plastic at home!
• Don’t want to use cash and envelopes for this method? You can use Stash partitions.

How to use partitions in your Stash account

If you would rather not use cash, Stash has a tool that can help you use the envelope method in your account. With partitions, you can create five different categories within your banking account to budget and save. You can make partitions for groceries, credit card bills, saving for a vacation, student loan payments, and more. 

Once you’ve established your partitions, you can set reminders for yourself to add money to your partitions on a schedule, such as your payment schedule. Plus, if you have Direct Deposit set up with Stash, you can automatically split each paycheck into different partitions, so you can continue achieving your financial objectives. 

When you’re ready to spend from a partition, you can move that money into the available balance of your Stash banking account. So when it’s time to go grocery shopping, move money from your groceries partition to your available balance to spend on your debit card.

Example of the envelope method:

Your total take-home pay each month is $2,000.

Fixed expenses: continue paying monthly fixed expenses as usual.

Variable expenses:

• Grab five envelopesor create five different partitions: label each with a variable expense (food & groceries, entertainment, household expenses, personal care items, and savings.)
• Assuming you get paid twice a month, input half of each expense with every paycheck. (If you spend $300 per month on groceries, each time you get paid, put $150 into your food envelope or partition.)
• Once the money from the envelope is gone, you can’t spend more money on that category.

Over time, make adjustments to your categories to reflect how you live. For example, maybe you spend more on entertainment than you thought, and less on household expenses. Or maybe you find you have money left over in some categories. Feel free to put that into your savings envelope  or partition.