ENVELOPE METHOD

This method is convenient for those who shy away from working with numbers. It allows you to set aside money each week for your various expenses, rather than keep paper and pencil records of what you spent. It is an excellent process for beginning budgeters to get started.

• On a regular basis, money is divided and put into envelopes for each category. Envelopes are labeled with specific purpose and amount, such as groceries, lunch money, payments due, clothing, utilities, etc.
• Amounts for each envelope are determined by estimating the expenses in that category and dividing your income into amounts to cover all expenses. With experience, it is easier to anticipate expenses and more accurately allocate amounts for each envelope.
• Record amounts in each envelope on the outside so you'll know how much to put in each pay period. Make changes as necessary based on past experience and upcoming expenses.
• Determine in advance your own rules for borrowing from other envelopes if the money in one runs out before the end of the period. If possible, try to limit your spending to the amount in the envelope for that expense. Borrowing from "Savings" or "Emergency" will draw down your reserves.
• Pay bills right away so you won't be tempted to spend the money for something else.
• Avoid shifting from envelope to envelope.
• Transfer any money left in envelopes at the end of the pay period into a savings and/or emergency bank account.

ADVANTAGES OF ENVELOPE METHOD

• Income is conveniently divided to cover all anticipated expenses.
• Money is always where it's supposed to be. It is easy to see how much is in each envelope.
• Very simple system. Usually works best for fairly small incomes.
• Requires little paper and pencil recording.

• It is risky to keep cash in the house.
• Although cash is conveniently available for spending, it may encourage careless spending.
• When shortage develops in one envelope, it is tempting to "borrow" money from another envelope. If this happens, control is lost.

MODIFICATIONS TO THE ENVELOPE METHOD

The envelope system can be used in combination with checks and/or specifically designated savings accounts. You might want to use the envelope system for such things as food, operating expenses, transportation, and incidentals.

For larger, more regular expenses such as rent or house payments, utilities, or time payments for which you receive a monthly bill, you may wish to pay by check. The check for these expenses can be put in the appropriate envelope until the payment is due. Of course, the money to cover the checks needs to be deposited in your checking account.

For your regular annual or semi-annual expenses like car, life and health insurance, property taxes, or other special expenses, you may want to establish special savings accounts for those specific purposes. You might consider vacation or Christmas Club accounts which require small regular contributions and "forced" savings. However, the interest rate paid on these accounts is usually low.