The Envelope System, or How To Stick To The Budget
A little while ago I wrote about using Cash, in a post titled Cash Is King! (Sorry Elvis); and in that article I mentioned using the Envelope System as a way to control your spending and avoiding some budget busters. I very briefly described how we use that system, but I’m not convinced that I taught you enough to fully implement that system with your own budget.
Long before the invention of debit cards, people would pay for many things with physical cash. They actually had physical money in their possession, esp. if they didn’t trust the banks (think post-depression). One method people would use to control their spending would be to allocate their pay into separate envelopes, so they would have enough money for the rent, utility bills, and to save up for large purchases (most people didn’t borrow for ANY purchase, even home!). As the check book, then plastic became more popular, the envelope system faded into history.
Now, many financial gurus, such as Dave Ramsey (and myself), recommend using this old system to remove the risk of overspending certain categories of your budget. I personally recommend (and use) envelopes for 3 categories. I think that you should use at least these three, but feel free to add others that you have a history of overspending on:
– Eating out
– Blow money (separate envelopes for me and the Mrs.)
Using the Envelope System is VERY easy! In fact, it’s easier than not using it when budgeting! Here are the steps:
- Complete your monthly budget, determining how much from each pay check goes to which category.
- Have your budget committee meeting and come to an agreed upon budget.
- After the first paycheck is deposited, withdraw the amount for each envelope category from an ATM.
- Put the cash in the envelopes.
- Only spend on each category from that category’s envelope.
- Once that envelope is empty, you are done spending on that category.
Don’t worry if it takes a few months to get it right; that’s normal! Like any new skill, this takes some practice. If you have any questions or need help, please ask in the comments or shoot me an email!
Objections I’ve heard:
- I might get robbed if I carry cash!
- no one knows you carry cash, so why would you be any more of a target than if you didn’t?
- What if I loose my envelope?
- I don’t carry envelopes around unless I plan on wanting to shop in that category. The amount of cash carried is minimized. Also, be careful, as you would with your debit card.
- It’s a hassel to pull out money every week/2 weeks!
- It’s worse to overspend at a restaurant and overdraft on the electric payment! Most banks have a drive-up ATM/teller; we don’t think it’s a hassle to hit the Starbucks drive through!
- I might run out of money and not be able to buy what I want at the grocery store!
- That’s the point! Put back the ice cream and sugar cereal and buy pop-corn and oatmeal instead; next time you will plan out how you spend your grocery money better.
What other objections do you have? Post in the comments below
If you are ready to start, you can buy a nice envelope system here, or check out the web for ideas on making one that fits your style and needs!