Envelope budgeting system – A simple way to control your expenses

Some months back, when we were working with a Mumbai based client of ours, we noticed that one of his expenses of “Eating Out” was extremely huge. Their explanation was they were never able to control the number of times they went out. So we thought how about limiting the amount spent somehow ?

Envelope budgeting system

Today I am going to share Let me share with you all a simple and effective budgeting system which has been in use for centuries – worldwide! . It’s called the “Envelope Budgeting system”.

The common problem across families is that they keep spending money on various things from a single card or pool of money. The basic idea here, with this system is to label your different expenses, categorize them if you will,  and keep an envelope with money dedicated to that category, in it.

When you need to spend on a category, voilà, you take the CASH for its respective envelope and spend. Let me give an example. Suppose your expenses are as below.

[table]

RENT Rs 10,000
GROCERY Rs 6,000
VEG+MILK Rs 3,000
BILLS Rs 3,000
MAID-SALARY Rs 2,000
MISC Rs 1,000
Total Rs 25,000

[/table]


envelope budgeting system

5 Simple points regarding Envelope Budgeting System

1. Once it’s gone, it’s gone

When you take some money out of an envelope, and spend it, it’s gone! You will be left with some remaining amount for that particular month. Now all you have to spend that month is the leftover. So spend it wisely.

If you still want only spend more than what the envelope contains, you just break the system. Better stop following it then. It’s not for you :)

2. Don’t transfer between envelopes

Just because you have some money left in some category, does not mean you can spend it on another category. This system is all about controlling your expenses in individual categories. Whatever is left in some envelope should go to your investments. It’s like a bonus leftover.

3. If you fail to follow, invest 10x the amount as penalty

It’s human to fall off the wagon. At times you will deviate from the plan and spend more money other than you allocated. In this case, you should penalize yourself for breaking the rule, by investing 10x the extra amount into some investments. For example, you have Rs 3,000 allocated to “Eating Out”  you spend Rs 5,000 in a month. Then you are using an extra Rs 2,000. You should penalize yourself by investing Rs 20,000 (10 times) in some thing to offset this crime. This will be a good spin on just desserts!.

4. Emergency expenses, but settle later

Ideally your expenses should be planned and the money should come from the envelope, but you will have to spend sometimes on your credit/debit card (read various credit card cashback offers), which is fine at times, but make sure you settle things back when you are back at home.

5. Guilt-free shopping

The thing I like about the envelope budgeting system is the “guilt free spending.” Once you have allocated the money to different categories, then you can spend up to the limit, without thinking much. That’s the best part.

TIP : Libin informed me in comments section that there is an Android app called Easy Envelope Budget Aid (EEBA) for this envelope system ! ..

Real life examples of its Effectiveness

Harpreet shares

I feel so proud to say that I follow this system.

Yes, many times I feel bound but I know what I have got by following this system. Be it getting rid of a loan (worth Rs.2 lacs), renovation of my home (worth Rs.2.5 lacs), be it car (Alto), money for Jewelry (worth Rs.1.5 lakhs), 40 k cash as gift to near & dear ones in a span of 6 years. Right now I am saving for my daughter’s school admission.

I agree that I never spent for grocery, maid salary & rent being in a joint family but still I wonder that I was able to achieve these targets when my present salary is just around 26k and when I started following this system 5 years back, it was much less.

I started this as I had no choice, but believe me I am now addicted to this system.

It’s not for everyone

A lot of people use this envelope system and are pretty successful in following it for months and years. However many people start this, but fail somewhere in middle and are not able to continue. Its all about how serious you are about controlling your expenses and being disciplined. Do you think this Envelope system will work in your case ?

52 CommentsAdd Comment

  1. My family has been following it for decades. Whatever the system discipline is the key. Will need more money than in the envelope quite often. We can’t beat ourselves up if we don’t stick it. Key is to cut down ‘want’ expenses, put in a practical amt in the envelope and keep track of total amt put in all envelopes.

  2. This is a good technique of controlling your expenses but it requires discipline…

    You should be discipline enough to abide by the rules that you’ve created for yourself and then only your goals would be achieved…

  3. Suhas

    Hi Manish,

    Nice article again.
    I create FD’s/RD’s for the purpose which act as envelops for some of my expenses (eg:-my kids school fees I make a FD at the starting of year for tenures as per the payment dates,A monthly RD every year for Diwali Expenses,credit card FD’s monthly,vacation RD’s). So I need not worry about arranging the cash for these activities as they come up.Also sets the limit automatically for my expenses.

  4. Libin

    There are an android application on this called “EEBA”, its free version is available in the PlayStore and is pretty good. I’ve been using this for the past three months and has helped me in my savings effort.

  5. KUNAL DHOTRE

    Dear Manish,

    Thanks for the article.

    Its seems very simple and I plan to implement it from today onwards.

    Regards,
    KUNAL

  6. Prasad

    Hi Manish,
    It’s very good article.
    I used to deposit all my money in a bank account and draw the same when ever required. All savings will be done upfront i.e. before start expending.
    Any how thanks for sharing such good stuff.

  7. Harpreet Kaur

    Dear Manish,

    I feel so proud to say that I follow this system.

    Yes, many times I feel bound but I know what I have got by following this system. Be it getting rid of a loan (worth Rs.2 lacs), renovation of my home (worth Rs.2.5 lacs), be it car (Alto), money for Jewelry (worth Rs.1.5 lakhs), 40 k cash as gift to near & dear ones in a span of 6 years. Right now I am saving for my daughter’s school admission.

    I agree that I never spent for grocery, maid salary & rent being in a joint family but still I wonder that I was able to achieve these targets when my present salary is just around 26k and when I started following this system 5 years back, it was much less.

    I started this as I had no choice, but believe me I am now addicted to this system.

  8. naveen ponnam

    Hi Mr. Manish,
    Thank you for this article.
    I am single and from last 6 years I am earning and spending the money without any financial plan. But now I decided to hold money in my hand. But it is very hard in starting. I planned so many types for control money but no use. But four months ago I started to note out my daily expenses along with description and necessity. Finally I found so many things that I shouldn’t purchase and control-less phone bills, restaurant bills, etc.
    So I decided to make a perfect plan about my savings three months ago
    “On my salary receiving day I am investing in my investments. And a certain amount I will hold for my food allowances. I ll divide this amount by 30 days. so my daily budget is declared and I have to spend the limited money or less than the limit only. If I save any money by spending less than my daily limited amount at month ending, it is bonus amount for me.

  9. This is something awesome Manish :)

    I really needed this kinda system. I spend huge eating outside and I will control it by this system from now onwards. 10x investment is an awesome rule. :)

  10. P Kharbanda

    Dear Manish

    Indeed! My parents taught me this method in 1981, when I got married and we successfully managed our budget for years. Aim is to discipline yourself and stick to your planning. Art of spending is to ensure that the envelope lasts till monthend!

    Good that it is being spoken about and being revived!

    Kharbanda

  11. Surya

    Good idea. As suggested it need serious decipline ( i don’t have). So that i created plan like, i’ve started SIP(RD, MF, Gold) in deifferent instruments. So that money will invest automatically, before it reaches me & SIP amount incremented month by month upto remaining amount in bank equals to my expenses. For example, if my salary is 40k, and my expenses calculated as 15k, then I’ll do my sip upto 25k. If u want to reduce more expense, do once more sip. Somehow i’ve controlled now…Thanx jagoinvestor team to provide good knowledge.

  12. Saurabh Salvi

    Hey thanks Manish for sharing such great ideas. This envelope system is really useful. currently am using your Budget Template excel for managing monthly expenses.(I got this from Jagoinvestor-Book_kit). Now I’ll start envelope system as wel.

  13. Thanks for the article Manish…. Envelope system definitely can work wonders; I say this after reading the amazing example narrated by Ms. Harpreet.

    Although its difficult for me as I mostly use Plastic money so how to make envelopes for that? I got an answer to this in 2011 when I got in touch with Jagbir (after I read his comment on one of your earlier articles). He shared an excel sheet template and I started budgeting my expenditure in that Pre Formatted Excel Sheet.

    Since past 2 years I have been religiously making my monthly budget in this Excel Sheet and tracking the expenses religiously. I also track investments under various heads like MF, PPF, Insurance, Gold etc etc. So, for me this excel sheet works as Electronic Envelope Budgeting as I have been able to save quite a lot :)

    I normally don’t overspend than budgeted but in some cases whenever I have defaulted I haven’t penalized myself. But, now as suggested I will penalize myself by investing 10X as penalty of overspending…

  14. rajivahuja

    Good idea. I think it should work to control expenses & increase savings which can be channelized into investments.

  15. sandhu b

    dear all,

    another excellent and thought provoking article.

    it will help everyone even if tried partialy but you have to have a will to do it.

    my wife used to follow something like this when we were newly married and it worked for us, till such time our inocense was clouded by wordly noise.

    now after getting rude shocks we again realised the trigger to follow it by this article.
    while discussing to start same, we realised two things :-

    1. in our earlier days we were not taking out something to save before putting every penny in envelops, so misc was a big fat envelope, so the whole purpose was being defeated which realised after reading this article.
    2. with time the name, type and no of categories (no of envelops required ) have changed drastically from what we used that time, so we are working on new headings and numbers and are taking out investments before distributing income into invelops

    any way thanks to trigger our minds

  16. Alok Sapru

    I like this article but rather put all your money to spend in envelopes is not a good idea. I prefer to put it in bank to gain interest. My habit is that when I get salary I calculate next 7 days expenses and put rest of the money in FD for 7 days. After seven days I repeat the process. In this way I can earn 6.5% interest rather than 4%. With net banking it is so easy.

    What you say Manish ?

  17. Kartavi Dave

    In my family, this system is being followed since last 10 years. However, instead of several envelops…. we are using a docket-folder (a hard covered folder having 20 to 30 plastic bag type sheets in it, which is generally used to keep original certificates separately for interview purpose. ) Each plastic cover has paper inside. We have labeled this paper and put money inside required for a month. It is convenient and easier to handle than several envelops. However, the funda is the same. It has introduced discipline for expenses in my family. It is best suited for salaried people like us. And, … again a nice post.

  18. marykutty

    So this was the name of the system which I followed some 16 years back! that time , we were going through a tough financial crisis- father fell ill, business was in debts and I was in college doing Degree. I took tution for kids, and managed home with that money-arnd 6k per month that time. So to manage, I used to get change from a Bank, all notes of 10’s and then make a rool- 30 ten rupee notes for Milk, 60 10 rupee notes for fish etc…It worked…Thanks to my ammachi who followed the system!

  19. jeetuojha

    I’m following for past 2 yrs and it helps me a lot. learn how to manage the budget

    Cheers
    Jeetu Ojha

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