Tracking and budgeting all your expenses for every month is not an easy undertaking if you are just getting started. You will either give up midway or find that you spend outside your allocations.
This struggle can be easily solved with the envelope budgeting method. This is a method that is best suited for those who have just started earning a salary and don’t know how to budget their income, and those who have been struggling to follow a budget.
The envelope method works by ensuring that once cash in a particular envelope is exhausted, you are not allowed to spend on that category until the next budgeting cycle.
These categories will include items such as groceries, fuel, medical, clothing, house-hold items, and entertainment, and kids accessories.
How much goes to what?
The first step to effectively using the envelope method is to identify the total amount you make every month and the total amount you spend. This will be easy if you have a formal job.
However, if you are in the informal sector where income is irregular, personal finance coach Josphat Kigwa says that you can create your own monthly average income by adding up your total earnings for the past year, then dividing the total amount by 12.
Once you receive your pay, keep receipts and records of how you usually spend money until your next monthly pay. In one column, list all your expenses and amounts used.
In another column, list all the must-have expenses. These should include basics such as food, rent, transport and emergency. Try to limit your spending to these items for a period of 30 days.
| Dates | Expenses (Example) | Must-have expenses (Example) |
| 1 | Food | Food |
| … | Rent | Rent |
| … | Entertainment | |
| … | Black tax | |
| 30 | Transport |
Buy physical envelopes and label them with each of your expenses in order of categories. For example, you can label the envelopes as groceries, utilities or transport.
Put money in each envelope. For example, you can put Sh. 5,000 in the groceries envelope and Sh. 6,000 in the utility bills envelope. You will stop spending on an item once its envelope runs empty.
When labelling your envelopes, Chacha Nyaigoti Bichang’a, a financial coach at Chachanomics Consulting Firm and the author of Mastering Your Money, recommends that you use the 80/20 rule to determine your allocations.
This can be further broken down to 50/20/30. “This implies that as soon as your salary hits your bank account, channel 20% to savings, 50% for the necessary and very essential expenses such as food, transport, rent, utilities and medical expenses,” he says.
“The remaining 30% can be spread out for wants or not very essential expenses like airtime, bundles, cable TV, gadgets, household accessories, entertainment etc. Depending on your needs, your allocations can vary between 50/30/20 or 50/40/10.”
To have this work for your envelope method, you will need to place a standing order with your bank or sacco so that the savings percentage is sent to your savings or investments account.
There are certain expenses which will not require an envelope because they will be checked off once your salary hits your account. These include debt repayments.
Once you’re left with your monthly budget, you can then allocate your envelopes according to your approximated expenditure.
For instance, if you find that you’re left with Sh. 17,000 for basic monthly expense planning, Nyaigoti says that you can allocate the envelope money as follows:
| Envelops | Allocation | Percentage |
| Food | Sh. 5,200 | 20% |
| Rent | Sh. 3, 900 | 15% |
| Transport | Sh. 2,600 / Sh. 130 daily | 10% |
| Utilities (Water / Power) | Sh. 1,300 | 5% |
| Social / Entertainment | Sh. 2,600 | 10% |
| Miscellaneous | Sh. 1,300 | 5% |
When one envelop runs out of cash
Do not start borrowing from the other envelopes if one envelope runs out of cash. For instance, if your clothing envelope runs out, do not borrow some money to spend on clothing from your groceries or transport envelope.
This will distort budgetary allocations since you will also need to carry the debt forward into the new month. “The best way is to find alternative ways of surviving without dipping your fingers into other envelopes.
For example, if you exhaust your lunch envelope, start carrying food from home,” says Kigwa. This may also cause you to see how much more you can save from carrying food from home and make it a regular habit.
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Also, if you start running out of transport money, don’t touch the lunch money envelope and instead start hiking rides home during off-peak hours.
“It must not be lost on you within the month that your envelopes are supposed to help you control how you budget your money,” he says.
Quick takeaway: Digital envelope
You can also use apps such as Spend Track which monitor your utilities, communication, domestic, entertainment and transport expenses, investments, rent, dividends, salary and bonuses, as well as your general assets and liabilities.
There are also digital apps that follow the envelope method. These are however more effective where you have significant budgeting discipline. One of these is the YNAB ‘You Need a Budget’ app which is available on AppStore and Google Playstore.
This app uses virtual envelopes. These virtual envelopes represent the most common household budget categories. When you record your budget with the app, it automatically distributes a portion of the money to each virtual envelope.
When you spend from any of these envelopes, you will be required to state on the app what the expenditure was and how much it cost.
The app will then make a deduction from the affected virtual envelope. You may also download the Goodbudget app which also uses the envelope method.