How to use the envelope method to budget your money

The envelope method is a simple but powerful budgeting technique that can help you keep your spending under control.

It involves setting up multiple envelopes (like Monzo Pots) and dividing your money between each one. You use the money in each envelope for a different thing (like bills, groceries or having fun).

It makes it easier to see how much you've got left for each type of spending, so you don't accidentally spend your rent money on something else.

Money-saving gurus like Martin Lewis and Dave Ramsey love it, and we see it crop up on personal finance forums and blogs all the time. It's gained a cult-like following because it's simple to use, and helps you see really clearly how much you've got left to spend on certain things.

It takes a little organising to set everything up. But you can do it all through Monzo. If you don't have Monzo yet, download the app to get started!

1. Balance your budget

First, you need to see if you can afford your expenses. This is called balancing your budget. It means comparing what you expect to earn with what you plan to spend, and deciding how to cut costs if you need to.

Monzo makes it easy to see all your spending, which will hopefully make this bit less of a slog.

It’s really important not to skip this step. As no amount of tips or tricks will work unless you know your income can cover your expenses. Plus, you’ll learn things about your spending patterns that can help with the next few steps.

2. Choose your categories

Next, group your spending into a few different categories, like:

• Bills

• Groceries

• Eating out

• Entertainment

• Shopping

• Holidays

• Savings

• Tax (if you’re self-employed)

There’s no rule about the number of categories. Just remember that each one gets its own envelope.

3. Decide how much to spend on each category

Decide how to split your income between the different envelopes. You should already have an idea about how to do this from the first step (balancing your budget). And because Monzo already groups your spending into categories, it should be easy to see how much you've spent in the past.

It’s usually a good idea to slightly overestimate the amount you’ll need for bills and other essentials. And don’t forget about big annual or one-off expenses, like Christmas presents or an MOT. You might want to update your allowances regularly to cover these. Or you could set up a separate envelope and put money into it every month so you’re prepared.

4. Create your envelopes and stuff them with cash

Each category needs it own envelope – a place where you can put the money you'll use for that kind of spending.

You can do this with Monzo by separating your money into different Pots. If you get paid into your Monzo account, Salary Sorter will even help you do it automatically after you get paid!

Give each Pot or 'envelope' a name, and put the right amounts into each envelope as soon as you get paid. When you need to pay for something, take the right amount out of the right envelope.

You can even set up a Bills Pot, so you can set aside money for bills and pay them straight from the Pot.