How to budget effectively and consistently Part I: The envelope system.

Are you looking for smart ways on how to budget your money effectively and consistently?

If yes, you’re on the right place. On this 2-series article, I’d like to share 2 smart ways on how to budget your money effectively and consistently.

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Budgeting is one of the basics in personal finance. In order save money, you need to learn how to budget.

Unfortunately, budgeting was not taught in school when we were studying that’s why many Filipino are having hard time dealing with this when they started working or when they started a family.

Nevertheless, we know that it’s not too late to start and learn how to budget properly. Whatever situation you have in your life right now, learning how to budget effectively will surely bring a positive impact in your finances and of course in your daily life.

Are you ready for the tips? Let’s get started.

Wait…

Before we dive into the list of ways on how to budget your money properly, there is one thing I need you to take note. Or maybe a requirement before you get started.

What?

You need to have the list of your income and expenses. Yes, list down all the money coming into your pocket and then list all the money going out from it.

Why?

To know the accurate amount of money you need to allocate in your budget. Plain vanilla, right?

You cannot make an effective budget system if you do not know how much you’re earning and how much you spend.

Why again?

Because you may fall short on the other categories and then have enormous excess on the others. And then later on, you’ll find yourself spending more than what you earn.

That’s why it is important to know how much you make and how much you spend before getting started and learning how to budget.

Now, I know you got a question. How could you know your income and expenses?

Plain and simple, you track it.

It doesn’t matter if you write it down manually, use a computer or through an app from your smartphone. As long as you’re tracking it down, your good.

Income is easy to track since most of the time it came in bulk. Maybe you have your payslip or you can generate transaction reports in your ATM if enrolled in online banking.

Tracking expenses is the hard one. I will not go into depth with this but I hope it make sense to you now. Here are some great tips on how to track your expenses.

Ok, so now you know you need to track your income and expenses. Let’s assume you already knew how much you’re making and how much you spend.

Or you can get that done first and then come back on this article when you’re ready.

The next thing to do is to create a budget plan.

And without further ado, here are my useful tips on how to create a budget plan or a simple budgeting system that will help you achieve your financial goals.

Here are the 2 smart ways how to budget effectively

1. The envelope system

Envelope system has been used for years on budgeting. It is one of the traditional way on how to budget your money effectively.

Though this method is manual in some terms, with proper discipline and determination it is proven to be very effective.

Let’s dig deeper on the envelope system and see how it can help you budget and achieve your financial goals.

How to budget using envelope system

Envelope system is very simple and easy to start. You just need to get envelopes and name them according to the categories of your savings and expenses(again you need to have the income/expenses tracker).

After that, every time your income came in, you put the proper amount of budget for each category of your expenses into the envelope. Each category has its own envelope.

And then every time you need to spend or buy something, you’ll get that from the envelope for that category.

Let’s have an example.

Let say your income is 30,000 per month. To make it more simple, let’s just say it’s the net. No taxes, deductions etc. Again just for simplicity.

In general, here are some of the common expenses you have in your daily life.

• Savings – 5,000 (could be emergency fund, investment or pure savings etc.)
• Rent – 5,000
• Bills – 3,000 (water, electricity and internet)
• Food – 8,000 (grocery, rice, snacks etc.)
• Work allowance – 6,000
• Entertainment – 2,000
• Others – 1,000

So in summary we have:

Salary: P30,000
Savings & Expenses: P30,000

How will you get these amounts? Again, track your expenses!!!

Now, to implement the envelope system, all you need to do is to have 7 envelopes for each category and then put the allocated budget inside the envelope when the money came in. Again each category should have its own envelope.

Every time you need to pay or spend on something, you have to think or decide in which category it falls and then get that money from that specific envelope.

Example:

You need to pay the water and electricity, so it should came from the Bills envelope.

If you need to buy groceries and other food supplies, it should come from the Food envelope.

And the rest goes the same.

That’s how the envelope system works.

Is this making sense?

The reason you’re doing this is to discipline yourself to strictly follow the amount you set for each category and not to came short within the month.

How would you know if you’re on the budget?

As mentioned earlier, you need to track your expenses first before you can do this envelope budgeting system. That way, you are not blindly putting money or budget on each envelope and then spending each of them too.

The amount you’re going to put in there came from your expenses tracker. That’s why it is important to list everything before getting started. And of course, you have to be honest with yourself for the amount. After all, it’s your money.

What if you overspent from one envelope(category) and then have excess on the other?

This will normally happen. There will be days/months that you’re going to have an excess budget from one or two envelope and then came short on the other. That’s normal. And what should you do? You go back to your expenses tracker and then check where did you overspent.

Ask yourself. Why? Is it necessary spending?

You justify. And if yes, you need to adjust. Of course you only need to adjust if it’s valid and necessary expenses. I mean if it is important.

If you you overspent because of something came out sale on the mall, it’s not advisable and you have to cut that out! Again, discipline, discipline and discipline is the key.

Adjust only for necessary and important expenses. Budgeting is not a fixed or permanent thing, you will need to keep on adjusting from time to time.

What will you do with the excess on some category?

There will also time that you’ll have some excess on your budget, especially if you’re really committed in saving money and properly managing your finances.

So what can you do with those excess? To be honest, it’s really up to you, but here are my suggestions.

1. add it on your savings
2. add them on the category that you overspent(again if necessary)
3. treat yourself a little bit

Those are just came from the top of my head and most of the time, that’s what we are doing. Of course, you can justify where you can spend them in useful and valuable ways.

As the month goes by, you keep tracking and adjusting your budget from the next month up to the coming month. Keep track, adjust and then repeat.

When you do this consistently, you’ll have a sound and better budgeting system that will help you achieve your financial goals. In no time, you’ll have more savings and less unnecessary expenses.

I hope this make sense.

Envelope system is tried and tested way on how to budget your money effectively.

The only drawback of this method is it is manual and sometimes laborious especially if you’re a busy person. Additionally, it requires lots of self-discipline to make it more consistent.

Now, if you’re not into manual or repetitive task, there’s another way on how to budget aside from what I mentioned above. I will call this automated budgeting. And that is our #2 for this 2-series article.

Next Monday, I’ll share what is an automated budgeting system and how you can use it to budget your money effectively. For now, kindly study this envelope system and see if it’ll work for you.

Over to you

How do you budget your money? Do you use the envelope system like what we are doing? I love to see them. Share your story or thoughts on the comment section below.

I hope this has been informative. Until next time, cheers!

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