How to budget with the envelope method

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If you struggle to make your money last until payday, you certainly aren't alone. Millions of us across the UK have the same money worries as we head towards the end of the month, ie. there isn't enough in the bank account to cover the money going out.

There are loads of different budgeting tools that you can try to use to keep yourself in the black, with a host of smartphone apps designed specifically for that purpose.

But one more rudimentary, though potentially more effective, technique comes from the tactic of envelope budgeting. So what is envelope budgeting and how does it work?

Keeping to cash

The first step is to work out how much money you have left after the essential bills - the mortgage or rent, the council tax and water bill for example - are accounted for.

Once you have an idea of how much disposable cash you have, then you can work out a few categories for your spending - things like money for socialising, for clothing or to cover your food shopping.

Next, try to determine how much you are going to budget for spending in each category and write out an envelope for each. After your next payday, you put that allotted amount for that category into its own envelope.

The idea is that you then only spend in cash, using the money in those designated envelopes. Once the money is gone, it's gone - you can't overspend if you don't have that money at your disposal.

Benefits to the envelope method

  • Physical, tangible way of handling your budgeting. Rather than simply worrying about fairly abstract numbers on your statement, you can see precisely how much money you have for each area and can't really hide from the fact that when it's gone, it's gone.
  • Doing everything in cash cuts out the risk of falling into an overdraft or missing repayments on your credit cards, which can only be good news too.

Considerations with going cash-only

  • You have to plan carefully to ensure you have the cash with you to cover expenses. You might have budgeted for a meal out, and have the money spare to do it, but there's no chance of going for that meal on the spur of the moment without a trip home to get the envelope first.

  • Online shopping and cash don't mix. However, if you are the sort of person who wants to cut back on their online spending then this budgeting method could be for you.

  • Using a credit card responsibly means you will build up a good credit file, which improves your chances of being offered the best deals on finance, loans and mortgages when the time comes. You miss out on this opportunity by solely relying on your envelope of cash.

Take the envelope approach but try an app

The envelope budget is great for getting into the right mindset and developing good habits but it has its restrictions.

A more practical approach might be trying apps which take the same mentality of the envelope budgeting method, by separating your money based on how you plan to spend it.

A good example here is Monzo, who allow you to divide your money up into 'pots' for different purposes. You can have plenty of different pots, all for different purposes, but also see how much you have overall in one simple place.

Alternatively there's Loot, a rival budgeting app which allows you to set a series of 'LootGoals' which you can devote your cash towards as and when you have it to spare.

These apps are a much more practical way of embracing envelope budgeting, but in a way that won't ultimately cost you money, damage your credit rating or prevent you from occasionally acting impulsively.