Have you ever heard of using the envelope system to budget? Envelope budgeting is an old technique that is coming back in fashion faster than big glasses and flannel shirts.
What is it? Budgeting with envelopes is simple. Certain categories you’ll designate to pay only with cash. You put that cash in an envelope each month and when the money is gone–its gone, no more spending for that category.
Why use Envelopes for Budgeting?
- You’ll spend less money if you use cash. People who use credit or debit cards have higher spending rates? Why? It is due to a slight feeling of pain when you use cash. It’s true, try plunking down $100 cash for your next grocery bill.
- Savings. We have an envelope for a future trip to San Francisco. When it fills up, we go!
- If you constantly overspend in certain categories, this will help you curtail that spending.
- If you get paid in cash or tips this system will give that cash somewhere to go, besides buying pizza. It will focus your money and you’ll think that you’ve got a raise.
Envelope System Video by LivLikeNo1Else
Budget with Envelopes
1. Determine what categories you’ll spend “cash only” for. Common categories are groceries, eating out, blow money, entertainment, clothing, and gas. TIP: Don’t try to start too many envelopes at once, but incorporate a few each month as you get the hang of it.
2. When you budget add up the total you’ll need each month to fill all your envelopes. This may take a few months before you’re a pro and some months will require more cash than others.
3. Make envelopes for each category and fill them up with cash- Write a check to yourself or withdraw it from the bank. Some categories may be large like groceries and you’ll need to fill them twice a month or as you are paid.
4. Keep a ledger of on each envelope of when money is deposited and spent. This will help you track your cash and know how much you’ll need each month.
5. When the envelope is empty, STOP SPENDING! You made a budget, now stick to it. Don’t borrow from other envelopes or add more cash. You’ll have to say no until next when you get more cash in that envelope.
6. If you have extra cash, then it stays put and rolls over to the next month.
Some people also like the idea of ‘virtual envelopes‘, but I find that having cold hard cash in your hands is the best way to curtail my spending.
Using this system doesn’t work for everyone. If you stay with it through the learning curve, you’ll start saving money by spending less. My wife and I started out with about 8-10 envelopes ourselves, but at the moment we only use 4.
Action: Try using the envelope system and let me know how it goes in the comments.
(Photo by BillRhodesPhoto)
[This is part of my How to Budget Like a Pro blog series]