How to Create a Monthly Budget with Nothing but Envelopes

More often than not, Americans will spend more money than they make. The country as a whole actually has a negative savings rate. People are borrowing more money than ever before to finance lifestyles they cannot afford. A major cause of this impending financial disaster is that most Americans don't take the time to manage their finances, plan for the future, and perhaps most importantly, write a simple monthly budget. Fortunately there's a way to budget that doesn't require a lot of advanced mathematical skills or accounting knowledge. The only thing you need to do get started is find a package of 5 or 10 envelopes, grab a piece of paper, and a pen.

It's called the envelope system, and it works on a completely cash basis. The general idea is that you designate a certain amount of money each month for certain categories, such as groceries and gasoline, and put the amount of money you designate for each category in an envelope. When you want to spend some money from one of your categories, you take the money out, spend it, put the change in, and go on with life. When the envelope's empty for the month, you're done spending in that category. This will prevent you from going over budget. The trick is that you can't just start throwing stuff on a credit card or a debit card once you've used all of the money you've budgeted for a certain category each month. That won't stop the behavior of overspending.

To get started with the envelope budgeting system, grab a piece of paper. Write the words, "rent/mortgage, groceries, gasoline, dining out, entertainment, savings, and retirement on the top." These will be the first five categories that you budget. You'll want to add other categories that you spend money on regularly too, such as clothing, child care, books, and the like. These additional categories won't be the same for everyone, but those should give you a general idea of the types of categories that you should have.