The first stage is to work out how much you have to keep aside each pay period for all your different bills (pretty much like any other budget). For example, if your internet bill was $40 a month and you got paid weekly, you would have to put aside $10 from each pay to cover that bill. Once you've figured out how much you are setting aside, you then get an envelope for each major bill or expense category and write the name of the expense on the front. When you get paid, you simply put the amount you worked out per pay period into each envelope, and then set the envelopes aside.
You can have as many or as few different envelopes as you want. At the most basic you might create one for food, one for "fun", one for your various utilities, one for irregular expenses (like car servicing) and one for unexpected expenses. Or you might have separate envelopes for every bill you get - phone, electricity, gas, internet, etc. How many envelopes you have is up to you. The important thing is that you put the money in the envelope, and then put the envelope aside.
The only time you access the money in the envelope is when you want to pay that bill. For example, when going grocery shopping you would take the food money envelope with you, and pay for the groceries with that money (and only that money). It would be up to you to keep track of your total while shopping in the store, and make sure that you don't try to spend more money than you have with you. While this may seem limiting at first, after a short while having that fixed limit in place should feel comforting.
The benefits of envelope method budgeting are simple. Because you only have the money in the envelope to spend, it is extremely difficult to spend extra money and break your budget. True, you can choose to just take money out of another envelope to buy extras that you haven't budgeted for. But this makes it an obvious physical act when you want to break the budget - you can no longer just hand over your plastic to spend you money, you have to go and actually get the money out of an envelope.
A second benefit is that you always know exactly how much you have to spend. Instead of having to think to yourself "do I have $10 or $20 left for food this week?" every time you need to buy groceries, you can simply see the amount left by looking in the envelope.
Of course, there is one important note about this method (besides remembering to do it!) As it will involve you having cash sitting around your home, be sure to keep the money in a hidden and secure location (and no, the freezer is neither hidden nor secure). The last thing you want is for someone to break in and steal your money!
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