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Today, I’ll introduce you to a popular budgeting method that works even for employees with small paychecks. It’s called the Envelope Budgeting System.
I learned this method from best-selling author, entrepreneur, and Catholic minister Bro. Bo Sanchez through his book “My Maid Invests in the Stock Market… And Why You Should, Too!” By the way, I highly recommend this life-changing book wherein Bo teaches personal finance and investing in a fun, readable, and non-technical manner. You can buy a copy of this book at any National Bookstore outlet nationwide.
Now, back to our topic, what exactly is the Envelope Budgeting System and how can we use it to organize our finances and save even if we have a small salary?
American businessman and motivational speaker Dave Ramsey defines the Envelope Budgeting System as the method when you use cash for different categories of your budget, and you keep that cash in envelopes. The system allows you to see exactly how much money you have left in a given category by taking a quick peek in your envelope.
In Bo Sanchez’ book that was mentioned earlier, he tells the story of how he taught this system to his maids so that they can save and budget their salaries. Bo told his maids that the moment they receive their salaries, they should divide it into five portions and place it into five different envelopes. The five envelopes should be labeled as:
First Envelope: Tithe Fund
Second Envelope: Expense Fund
Third Envelope: Support Fund
Fourth Envelope: Emergency Fund
Fifth Envelope: Retirement Fund
Let us discuss these envelopes one by one, taking as an example how Bro. Bo’s maids are exactly using this system for their salary of P7,000 a month.
First Envelope: Tithe Fund
Bo explained to his maids the importance of giving back to God and the blessings that come from doing this. He told them that tithing will allow them to grow in abundance thinking. According to Bo, giving to God’s work will make you think rich and feel rich. When you have this way of thinking in your life, you will change your way of living as well for the better, and soon you will become very rich.
Personally, I like to think of tithing as simply devoting any regular percentage of my income to any worthy cause that is not necessarily religious in nature.
Bo said that his maids follow the biblical guideline of allocating 10% of their income for tithing. That means they give P700 a month. He also emphasized that he is not forcing his maids to tithe 10%. In fact, he wanted them to decide on their own how much they wanted to give.
Second Envelope: Expense Fund
Money in this envelope is what should be used for our daily needs and wants. We spend this money on our clothes, toiletries, food, cellphone load, movie and restaurant dates, etc.
However, we should discipline ourselves to ONLY use what is EXACTLY in this envelope until we receive our next paycheck. We should not use the money in the other envelopes for our daily expenses, otherwise, there is no point of using this system.
For their monthly expenses, Bo’s helpers spend only P1,000 a month since they are living in his house, and they don’t have to spend too much on food and lodging as it is already provided to them.
Third Envelope: Support Fund
Bo’s maids place P2,000 a month in this envelope, which is the amount that will be sent to their families back home to their provinces.
My advice to all breadwinners out there who will follow this method, you should exercise tough love. Even if you can afford it, don’t send more than what your family regularly receives from you. Stick to a fixed amount and follow it. Otherwise, you will end up back to zero again with no savings and emergency fund.
Fourth Envelope: Emergency Fund
Bo told his helpers that they need to create an Emergency Fund which is separate from their savings. Because every once in a while, their families will call them to ask for money for an emergency such as the death of an uncle, the hospital confinement of a niece, the typhoon that ravaged their crops, etc.
Bo’s helpers allocate P1,000 a month for their emergency fund and this gives them peace of mind that they have money for any kind of family emergency.
Many financial advisers say that it is best practice to have at least 3 to 6 months worth of our usual monthly expenses saved. They say this because it usually takes an employee at least 3 to 6 months to find a new work after losing their previous jobs, and our emergency fund can be spent on our needs for the time being until we find a new source of income.
Fifth Envelope: Retirement Fund
This envelope contains our real savings. Bo calls this as Retirement Fund because he wants this fund to be used by his maids so they can retire as millionaires. Bo said that his maids are investing the money in this envelope in the Philippine Stock Market as it is the best way for them to grow their money.
Let us review the simple Envelope Budgeting System being used by Bo’s helpers:
They earn P7,000 a month.
They tithe P700.
They spend P1,000 for their daily expenses.
They send P2,000 back home to their families.
They save P1,000 as their Emergency Fund.
That leaves them P2,300.
They can remove the P300 for their miscellaneous needs.
Finally, they invest P2,000 a month in the stock market.
Budgeting is a personal matter.
I believe that budgeting, and personal finance in general, should be personal. What works for Bro. Bo’s maids may not work for you or me. In that case, we can modify the percentages of our income that are allocated in each envelope according to our needs and liking. For example, since there is no free food available to me and I am spending on gasoline for my motorcycle that I use to go to work every day, the amount I allocate in the Expense Fund is the largest among all five envelopes. The most important thing is that we should use this envelope system to bring us closer to our own financial goals.
Also, we should NOT cheat on our envelopes. We should discipline ourselves not to borrow from other envelopes although it can be very tempting to shuffle cash from one category to fund another. We should always keep in mind that the very purpose of the envelope system is to curb our spending and teach us discipline. We need to put the envelope system to work for us and take back control of our finances.
