The Envelope System is a cash based budgeting tool that has been around for ages. Today, it continues to successfully hold a family to their budget. Some may think that a debit card is a safer alternative to credit cards, but when it comes to budgeting they can be just as dangerous. Both debit and credit cards offer the same convenience and problems – they are easy to use and they make it easy to spend all of your money. If you don’t use cash, you no longer feel the emotional pull of money being sucked out of your wallet.
In the attempt to be frugal, the Envelope System is a very successful technique that’s making a comeback these days. It takes a little bit of time to get started, but that is only because you have to understand your budget before you start using the system. The good news is it’s time well spent!
Getting Started:
- Itemize all annual expenses. Include regular monthly expenses like car, rent/mortgage and utilities. Be certain to include irregular expenses like annual property taxes or semiannual car insurance payments.
- Divide the annual amount that you calculated in step 4 by the number of times you get paid per year. This gives you the contribution amount per envelop per pay-period.
- Figure other monthly expenses. Study the history of your spending and figure the amount you need per month all other expenses.
- Group all expenses by category. For example; food, utilities, auto, etc.
- Document it. Write out budget based upon the information you’ve gathered. You’ll need it in order to step back and see the big picture and as a baseline for where you started.
Stuff the Envelopes:
- Get enough envelopes for each category.
- Label each envelope with the name of the category and the amount you plan to contribute.
- With each pay-period deposit the proper amount of money into each envelope.
- Monitor and adjust the amounts as you notice left over money or struggles with each envelope. You made need to make adjustments from your original calculations and projections.
Empty Envelope = Stop Spending.
Once you are committed to the Envelope System you must stick to it! When there isn’t any money left in an envelope, you stop spending. It’s as simple as that. There may be a last minute party invite but if your entertainment envelope is empty it is time to RSVP No. Even if you have $20 left over in your clothing envelope and your favorite brand of shoes is on sale for $35, it is time walk away.
Revise and Repeat.
Your budget can’t be set in stone. Just as with life your budget will be ever changing so be certain to review your plan frequently. Daycare expenses will go away eventually or you may find a better deal when bundling your cable, phone and Internet. As you have left-over money each month allocate it to an area that may be stretched, maybe medical or food. With the cost of food and gas on the rise these days this may be an area that will be frequently stretched. However on a positive note, if you consistently have more money in certain envelopes than planned, set that money aside into an emergency fund envelope and save it for a rainy day.
The Envelope System may seem old school at first, but it works. It really does.
{ 5 comments… read them below or add one }
This is my second week but I’m starting to get the hang of the envelops and realize I need more categories than when I started off with.
Thanks for your comments! For now, I’d suggest including everying in one of the six envelope categories. You’ll gain more in-depth tracking in a future challenge.
I am eager to try this. I am one that got rid of the credit cards (2) and thought that if we only spent what we had we would be okay. However, like you said, the debit card is just about as bad as a credit card. I would go out and buy groceries, gas, and other “necessaries,” and the next thing I knew our bank account was almost drained. When you do not see the money leave your hands, it is almost like there is an endless supply. I am getting the envelopes started and really trying to fine tune the budget.
Way to go, Michelle!
I am also going to try this. Sounds a bit daunting but I am going to give it a try. What do you suggest I do with my debt card? Like you said “it’s almost like a cedit card” and I use mine religiously.