I’ve found that people who have tried the envelope system but ended up hating it, made one common mistake. They made too many envelope categories. The envelope system of budgeting is exactly how it sounds. You create budget categories and set aside a certain money in each category and put it in an envelope to be used for the month. My wife and I have been using the envelope system for the past two years, and we have refined it significantly. At first, we had nine categories for budgeting envelopes, but it seemed overwhelming and tedious to keep track of all those categories. Today, we now carry five envelopes full of money, and the rest of our money stays in our bank account to pay bills and transfer savings to our shor-term and long-term investing accounts. Here are our five envelope categories:

1. Groceries ( this is any food you buy at the grocery store)
2. Household Items ( this is anything you would buy at wal-mart or target for everyday living)
3. Gas (some people don’t like going inside to pay, you don’t need to have this envelope, but we chose to do so)
4. Entertainment (this includes eating out fast food or sit-down restaurants)
5. Clothing ( any new clothes that you buy and possibly dry-cleaning bills)

These are the five categories in our household which we try to track the most, because they are the ones that can get us in trouble the most. Everyone has their static bills that don’t vary much such as mortgage/rent, utlities, cable, insurance, and debt payments. But, things like eating out, buying accent items for the house, or buying clothes can really get us in trouble with our budget. Sub-categories like pet food can be put under groceries or household items, and remember that your small luxuries like coffee at Star Bucks would be considered entertainment. If you’ve never used the envelope budgeting method, try it out and use my categories as a guide so you don’t go crazy with the categories.