Budgeting with an “Envelope” System

How do you decide on where to put your money? You want to save but you also want to live a little. Don’t forget bills! And what do you do with expenses that you are anticipating?


Here is a basic budgeting system:


The best way to budget your money is to decide before you receive it where each dollar will go.  This is a combination of various budgeting system- and it works!


This is a cash budget which means that you can only spend money you actually have. Some financial advisors will tell you to only use actual cash or direct deposits but I see no harm in using a credit card AS LONG AS THE MONEY NEEDED TO PAY FOR IT IS ALREADY IN YOUR ACCOUNT. I still recommend, unless you are great at self-control and are very good at keeping on top of the amount in your account, to use cash for discretionary spending- food, splurges etc.


The best way, in my opinion, to keep track of your money is to divide it into separate categories as soon as you get it. Some will tell you to take out the money and put it in a labeled envelop, hence the term “Envelope system” but in the modern era I suggest you open several sub accounts and just deposit the money in there.


CapitalOne360, (https://captl1.co/2vl8R8a) for example, allows you to have many savings accounts that can be named whatever you want and can be accessed easily from your computer or phone. You can transfer money directly from your main checking account, so it’s easy to divide your paycheck. However, you can only withdraw 5 times a month from each savings account so keep track. If you do put purchases on your credit card, pay a bunch at a time, instead of each individual transaction so that you don’t use up your withdrawal limit.


Each person will have their own categories but here are some basic ones that I will discuss:





Coming soon





Basically, you divide your paycheck every month (or 2 weeks) into these categories and transfer them into the corresponding accounts. Some will be a fixed amount monthly and some will percentages.


So… this is how it works….


Maaser (Charity)- 10% right off the top. No need to think about this one. Put it another checking account or savings account and you can give it out as needed.


Savings- This should be approximately 15% of your paycheck but you should try to make it as high as possible, especially if your bills are low. It should definitely be more than your splurge or clothing account. You take this money and put it wherever you are on the Savings Ladder. (If you are working on emergency, you put it there, if you are up to retirement you put it there etc.)


Bills- Take all your bills and add them up. If they sometimes fluctuate round up from an average month. Put that amount in your bills account. If there is leftover at the end of the month, it rolls over so when your electricity bill is higher in the summer, you have some extra money in the account to cover for it. The best part of this system is that when you get a bill you already have the money in your account to pay for it. No playing catch-up!


Transportation- Take your gas bill or bus costs and figure out how much you spend approximately each month. Put that amount each month into an account and roll it over if there are leftovers. This makes sure that if one month you use more gas than you have extra money in the account to pay for it. If you have fixed transportation expenses, i.e. bus card, then you can use combine this with your bills account.



Car- If you own a car you should also put some money in for car maintenance. If you put in a small amount each month then when you need maintenance done on your car then you will have the money for it. Car problems don’t need to mean an emergency. (Although I am using a car as an example here, you can set up accounts for anything that you have that needs regular care).


Coming soon- This is the account that is for very short terms savings. You can also call this a holiday account. This is for things that come up every once in a while but not regularly. Examples are holidays, birthdays, weddings, and semi-big purchases that you will need or want, ex new computer or phone.


Clothes- This is the same idea as the “Coming soon” account. Put aside money each month for clothes, shoes and accessories. Although you may not shop each month, the money rolls over so you can shop freely when you want. This can also help you take advantage of sales- during an off-season you can buy clothes on sale without guilt because you have the money put aside for it!


Food/Discretionary- This account is for all the food, toiletries and day-too-day spending. This money can stay in your checking account because this is the money that you are spending every day. Again, if you have leftover money, roll it over into the next month.


Splurge- This is the last account to be filled and the first one that gets cut out when things get tough. Obviously, each person will have a different idea of what gets paid from the splurge account, but this is the account for fun.


These are just examples of some of the accounts that I have (I also have one for property taxes and building fees, as well as some others) and each person will decide which accounts or envelopes they need. You may have accounts that change over time and you may need new ones as your needs evolve. The point is to have money to cover all your expense and anything that may come up. Planning for events and purchases that are bound to come up will leave you with security in knowing that the money you need is set aside.

Read more here about budgeting with an uneven paycheck.