How to Stick to a Budget: The Envelope Method

You’ve worked hard on your budget. You’ve categorized all your spend, analyzed your habits, calculated your expected savings. You spend a month obsessing over every withdrawal, every expenditure. Your discipline is a thing of beauty. But can you stick to a budget long-term?

A couple of months later, the budget’s in tatters and you’re not entirely sure what you could have done differently.

It happens to the best of us. It happens to all of us. Most of all, it happens to the people who don’t admit it happened to them. So don’t listen to that blogger flexing in the corner next to a picture of a Maserati that he doesn’t own.

You need two things. The first is to forgive yourself. You’ll get past this, we all do. The second is some new methods of self-control.

Let’s get into it.

It’s hard to stick to a budget. Failure is not a reason to give up

When you learn to play a sport, you don’t expect to hit the bullseye with the dart, or the goal with the penalty kick, or the baseline with the tennis ball, on every attempt. Even less on your first attempt.

The same applies here. You’re learning to do something new, trying to break old habits and build new ones. Deviations from the path are to be expected.

Your ability to proceed despite setbacks, to get back up when you fall down. That’s a better predictor of whether you’ll manage to get out of debt, or reach financial independence, than whether you stuck to your budget in any given month.

So take a moment. Acknowledge that this month did not go as planned. Resolve to do better next month. Analyse what went wrong and start anew.

To stick to a budget, control yourself

The budget is just numbers on paper. Sticking to it is something you do, not something that just happens. That means you need to keep yourself motivated, determined, enthusiastic and positive about the process. From start to finish.

As human beings, our brains react well to things that are new. That’s why you can stick to a budget the first month or two, when you’ve just finished cooking it up. The whole exercise has novelty to it. Your brain likes novelty, and engages with subjects that provide it.

So try to keep things new. Change up your methods, adjust your budget, set new challenges and use new tricks. Make colourful charts, optimize different parts of it over time and use different ways of controling your conscious and unconscious spending.

In this article, we’ll look at one method in particular. The budget envelope method.

What is the budget envelope method?

The envelope method is a simple, easy-to-adopt, but powerful technique to help you stick to a budget.

It takes the different budget categories, and makes them a physical thing.

It works like this:

  1. You withdraw from your bank account the exact amount in each budget category. You then put that money in separate envelopes, and write the name of the category on the outside.
  2. When you need to spend money, for example when you go grocery shopping, you take the relevant envelope with you. You can spend the money in that envelope. When it runs out, there’s no more money for that activity until the beginning of the next month.

That’s it. Simple and easy.

Why does the budget envelope method work?

It makes your budget a physical thing.

There are many dangers to contactless payments, and other friction-free payment methods. There’s a reason companies want you to sign up to things on a monthly basis, often with a free trial to entice you. Once that monthly payment is automatic, you barely notice it at all, and you’re much less likely to cancel it.

If your money is in an envelope, you need to remember to take it with you and pay with physical money. You’ll also be constantly, vividly aware of the amount of money left in that envelope.

We’re much more aware of things we feel and touch. Numbers on an screen don’t have the same immediacy. Neither does waving your phone or card at a contactless receiver.

The budget envelope method also works because it sets a hard limit on your spending. The money in the envelope is all there is. If you want another glass of wine down the pub, there needs to be cash in the envelope to pay for it.

Should I use the budget envelope method for every budget category?

The budget envelope method obviously doesn’t work for either very large payments (your rent, perhaps), or for payments that need to be made electronically or by bank transfer. Some categories must therefore remain virtual.

Withdrawing large amounts of cash can raise eyebrows at the bank. It’s best to withdraw the cash over time, rather than all at once. For certain types of payment, it’s best to stay with established banking methods, such as transfers, cheques and cards.

For example, the envelope budget method isn’t going to work for the following categories:

  • Credit card repayments
  • Payments for large items such as your rent
  • Utilities such as gas, electricity, water or the internet, if they are paid by direct debit
  • Items that cannot be paid in cash (parking fees in certain parts of London)

So there are exceptions, and they’re not a problem.

My advice would be to separate these payments completely. It’s best not to split a budget between envelopes and online payments. For example, don’t buy some of your groceries with cash and some with a card. That will undermine the entire system. If your water and electricity payments are online, there’s no point making your gas payments in cash, just keep all your utility bills online.

Also, categories that are discretionary, such as entertainment, groceries and fuel, are more important to switch to envelopes than categories that stay the same each month. Your rent never changes, so there’s no point in paying that in cash, your self-control isn’t an issue there. The envelope method won’t help you stick to your budget.

What if I run out of cash?

The aim of this method isn’t to cause undue hardship or starve yourself. If you have budget overruns for various reasons, you obviously have to deal with it somehow.

That said, you should examine the reason for the overruns.

If your overruns are in groceries, and you’ve bought non-essentials this month, then those have to be reduced. Perhaps your meals are too expensive and you can reduce the cost there. Perhaps you’re too suceptible to supermarket sales techniques, and you need to plan your shopping better.

If it’s fuel, can you use your car less, or drive more efficiently? If it’s utilities, are you overheating your house, or not turning off appliances? If it’s entertainment, then can you go out less, or perhaps spend less at restaurants?

Finally, to stick to a budget, it has to be achievable. If you keep overspending, then perhaps the budget is simply too small. You need to either accept that, or tackle some of the more challenging cost items. For example, pay less rent.

Don’t fail to pay creditors, don’t starve yourself or your family. Sticking to a budget is an important priority, but it’s not more important than your health, or making minimum payment on all your debts.

Conclusion: How to Stick to a Budget with the Envelope Method

The envelope budget method is a great way to stick to a budget if your main challenge is either money awareness of self-control.

It forces you to remain aware of your spending and your budget every time you pay for something. It’s been effective for many, many people and it can help raise your money awareness too.

Once money and budget awareness are a habit, you’ll find you can switch to less onerous ways of controlling your budget. You can always do the envelope method again for a month if you want to refresh your awareness of your spending and budget.

Have you used the envelope method? What was your experience with it?