3 Budgets That Are Better Than the Envelope Method

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The envelope method of budgeting is good, but there may be a better budget out there for you.

According to a 2020 survey by the National Foundation for Credit Counseling, only 47% of Americans use a budgeting method to track their spending.

I'm convinced that a big reason people don't budget is that we're all so busy, and budgets can be incredibly complicated. And let's face it, if a person is living paycheck to paycheck, they don't want a budget reminding them of that fact.

Before we get into the budgeting approaches that are even better than the envelope method, let's touch on ways budgeting can benefit anyone:

  • Budgeting reminds us of where we are today, but a good budget also helps us see where we can make changes that will improve our personal finances.
  • A simple budget makes us feel more in control, more on top of our finances.
  • Keeping a budget allows someone else to take over the task of paying our bills if we become sick or incapacitated.
  • A budget nudges us when our spending is out of line with our goals.

The best budget for many of us is one that is simple to use, requires very little time, and gets the job done without any fuss.

The envelope method

Financial guru Dave Ramsey is probably the biggest cheerleader for the envelope budgeting method, and it can work.

With the envelope budgeting method, you plan how much you will spend each month and create an envelope for each expense. For example, you might have one envelope for rent, another for groceries, another for school lunches for the kids, and so on.

Once you spend the money in one envelope, you're done spending in that category. So, if you're at the grocery store and run out of cash in your grocery envelope, you either need to stop shopping until the next time you're paid or borrow from another envelope.

It's all cash, meaning you'll need to be comfortable carrying large sums of money to pay bills.

Frankly, there are other -- better -- budgeting methods that aren't quite so pick-pocket-worthy. Here are three of them.

1. Pay yourself first

This is the budgeting method I wish I had started with when I was young. As the name implies, you set aside a specific amount of money to pay off debt and save for the future. The rest is yours to do with as you will.

Let's say you bring home $5,000 per month. You decide to put $500 of your earnings toward paying off debt and another $500 toward savings and retirement. That leaves you with $4,000 to pay all other financial obligations.

That means that when you're deciding where to rent a new apartment or whether you want to buy a car, you base your decisions on the $4,000 you have to work with. It's as if the extra $1,000 doesn't exist -- it's already spoken for.

2. 50/30/20

If you've ever heard Sen. Elizabeth Warren speak, you know she's a keep-it-simple kind of person. And it was Warren who came up with this keep-it-simple budget. The 50/30/20 budget is designed to break your expenses down into three categories:

  • Necessary expenses (50%)
  • Discretionary expenses (30%)
  • Savings and debt payments (20%)

Again, let's imagine that you bring $5,000 home a month after taxes. With this budget, you would spend 50% ($2,500) on necessary expenses like rent, car payments, utilities, and groceries. The next 30% ($1,500) is earmarked for extras like clothes, dinners out with friends, and satellite radio. The final 20% ($1,000) is split between paying down existing bills and savings.

This is the budget I use. What I like about it is that you can tailor it to your circumstances. When my husband and I carried more debt, we'd shift things around so that we had more than 20% a month to pay down debt. Of course, that meant we would have less for going out.

Eventually, we realized that spending 50% of our take-home pay on necessary expenses stressed us out. As we began to live below our means, we had more to put toward saving and investment goals, and our percentages changed. Today, our budget is more 30/20/50 – but that could change.

Breaking every expense down into one of three buckets gives me a better sense of where our priorities lie.

3. The five-minute-a-day budget

This one is all about tracking. Here's how it works:

  • Make a list of your monthly bills. The idea is to know when automatic payments are due to be taken out of your bank account. (Quick tip: The five-minute-a-day budget is even less trouble if you set up as many bills as possible on autopay).
  • Look at your checking account balance at least once a day. Go into online banking or download your bank's mobile app. This task should take a few minutes a day, at most.
  • When a payment has been withdrawn from your account, pull out your list and mark the date next to it. Now, at a glance, you can see how many more bills are due.
  • Once a week, calculate how much money you expect to be deposited that week and make sure it's more than enough to cover any recurring expenses that are scheduled to be withdrawn.
  • Decide how large a pillow of cash you want to leave in your account each month, and never allow your checking account to drop below that amount. When we were young, I remember our pillow being $200. If we got anywhere near $200, I knew we had to make some decisions (like not going out for dinner or to a movie).

The five-minute-a-day budget is about making sure there's more coming in than going out and not spending money you don't have.

Whether it's with a budgeting app or pen and paper, there's a budgeting method out there for everyone. Once the 53% of Americans who don't budget get a little practice under their belts, they're likely to wonder what took them so long.

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