Basically, to make the envelope method successful for you, you have to determine your budget for each category of expenses you have, put a specific amount of money away for each specific category, and not spend anything more for that category than what you've put away for it. It sounds harder than it really is, so let's begin.

To start, you have to actually sit down and figure out your actual income. Next, figure out your actual spending total month to month. This step may take a couple of months of collecting receipts, but be diligent and honest with yourself so you can see what you are actually spending and what you are spending it on. Then, set some spending limits for certain categories, like food, gas for the car, clothes, gifts, credit card, etc. This is called budgeting! To actually make yourself stick to your budget each and every month is where the envelopes come into play.

Once you've figured out how much you are spending and have put limits on yourself, it's time to break out the envelopes and get them working for you. Label each envelope with an expense category. For example: food budget, gas for the car budget, treats for myself budget, entertainment budget, utilities budget, etc. Once you've determined your categories and your limits for each category, put away the cash in each envelope that will be your spending limit. Each time you get paid, you add cash to the envelopes in pre-determined amounts. You use the cash in the envelopes only for what they have been set aside for and once the money is gone, you don't spend any more money on that category until you put more cash in from your next paycheck. You can divert money from other envelopes if you run into a deficit, but just be aware that for every dollar you take out of an envelope, you have that much less to spend in that category until the next time you are paid.

If you don't like keeping physical envelopes full of cash on hand, there are electronic envelop budgeting systems you can set up. The nice thing about the electronic systems is that you can set up alerts to tell you when certain envelopes are running low. It also tracks your expenses for you so you can get an even clearer picture of where your money is going.

The point of envelope budgeting is to reduce over-spending. If you know you only have a certain amount of money for food this month, you are much less likely to go out as often or to purchase things at the grocery store that you don't really need. If you commit to not spending more than what is in your envelopes, you will reduce your debt and learn to live within your means. You will see radical changes to your personal finances if you follow this simple method and force yourself to stay within your budget.