How I budget using the Envelope Method

A good budget should give you peace of mind and help you achieve your financial goals.

In its strictest form, the Envelope Method requires that (using cash), you physically divide your monthly income into differently labelled envelopes, based on categories like Groceries, Bills and Entertainment etc.

You’re only able to spend as much on that category as you have in that envelope. The amount inside the envelope is seen as an upper limit rather than a goal to hit, so if there’s money left over in an envelope it’s saved rather than spent.

I use an adapted version of the Envelope Method to:

Not require physical cash
Keep tabs of my expenses
Maximise my savings and investments
Give me freedom to spend

My prioritised budget looks something like this:

	May	June	July
Salary	X	X	X
...
Total Income (TI)	X	X	X
Essential Expenses (most important)
Rent	X	X	X
Gas & Electricity	X	X	X
Travel (AMEX)	X	X	X
Groceries (AMEX)	X	X	X
...
Investments
Stocks & Share ISA	X	X	X
...
Cash Savings
Bank account	X	X	X
...
Non-essential Expenses (least important)
General spending (Monzo)	X	X	X
Holiday	X	X	X
Gym membership	X	X	X
...
Total Expenses (TE)	X	X	X
Balance (TI-TE)	X	X	X

Essential Expenses

These are the basic necessary costs of living that we’re all familiar with. I aim to keep these costs as low as possible - sites like uSwitch and Hotukdeals are great for this. Where possible, I’ll use my AMEX Credit Card to help build a good credit score and earn cashback.

Investments

Investments are a key part of my budget. The aim is to grow my money through a broad range of investments; from Index Funds (through a S&S ISA) to crowd-funding on sites like Crowdcube.

Cash Savings

Because invested money is generally tied up and harder to access, it’s important that I have a sufficient amount of easily accessible cash in case of emergency. Should this build up to sufficient levels, I'll start to funnel money into investments instead.

Non-essential Expenses

These are all the other costs that aren’t necessary for basic living. Here I follow a loose interpretation of the Envelope Method; using a broad “General Spending” bucket for simplicity and flexibility. It’s comparable to giving myself pocket money to spend on whatever I want. This will include all irregular costs like shopping, coffees, restaurants, going out, movies and books etc.

I like to physically separate (like an envelope would) my general spending using a Monzo card. Every month I’ll top-up my Monzo card to give myself £X. Just like the Envelope Method, I can only spend as much on general spending as I have available in my Monzo.

A similar (albeit digital) separation can be achieved if you prefer to use one card instead, as many banks nowadays (including Monzo) let you create multiple “pots” or accounts within the same bank.

My recurring holiday expense means that even if I don’t have a holiday planned yet, I’ll be setting aside some money every month to be ready for when one does come up. This can also be used to save up for a big purchase, like a new laptop or TV.

Balance

This is simply Total Income minus Total Expenses. The aim is to keep this close to £0, or just a little above for a small buffer. A negative balance is bad of course, as it means that I'm spending more than I earn. However, being over by too much isn't good either, as it suggests that I'm not effectively using (mainly investing) my cash.

In summary

This method of budgeting has proven very successful for me. The clear ranking and separation of what is and what isn’t important allows me to easily and effectively divide up my monthly income into different buckets.

Accounting for recurring expenses gives me a good grasp of where my money goes, whilst the relaxed lumping together of General Spending still allows me the freedom to spend. Once set up, it's easy and painless to maintain - it only takes me a few minutes every month to update.

I made my budget on Google Sheets, being in the cloud means I won't lose it and it's accessible from anywhere.

Happy budgeting! 💵