Budgeting Help: The Envelope System

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Would you like some help with your monthly budget? If you have been reading this blog for a while, you know that’s one of topics I love to discuss.

I cover the budget topic frequently because, I firmly believe that a working budget is absolutely essential to win with your money.

Today I want give you a little budgeting help by covering the concept of the “envelope system“. This involves selecting a few categories (no more than 3) on your monthly expenses and using cash instead of the debit card to pay for them.

These are categories where you might have trouble with impulse purchases or where you consistently exceed your budgeted amount for the month.

Why use Cash?

You might ask, what’s the difference? Why give up the convenience of just swiping the plastic? Here are a couple of reasons for using cash:

  • Typically you spend more when you use the plastic that when you use cash. That’s because there is more pain associated with green dollars leaving your wallet than with a simple card swipe.
  • Having an amount of cash designated to a particular budget area will keep you from overspending. When the cash is gone, you have to stop. There is no more.

 

How do I Start?

As I mentioned above, you don’t want to do this for more than 3 categories. Let’s say we will start with Groceries:

  • Determine what you will spend this month. For example, $400.
  • Assuming you get paid twice a month, when you get paid on the 1st take $200 cash out of the ATM or write yourself a check for that amount and cash it.
  • Put the $200 in an envelope and label it “Groceries” or “Food“.
  • When you go to the grocery store, pay only using the money that is in the envelope.
  • Next pay period (on the 16th), take out the remaining $200 and put it in the envelope.
  • For the month, only buy groceries with the money that is in the envelope. Once the money is gone, you can’t buy any more groceries.

My experience with using this system is that you will get your monthly grocery expenses under control. This will become a very predictable portion of your budget.

I suggest you try this for the next 3 months (Aug-Sep-Oct). Once you are confident in the system move to another category such as “Restaurants” and execute the same process.  Once you are satisfied try it with “Clothing“.

That’s exactly the approach we took in our household and we have never looked back. No more out of control spending for those categories.

Try it. You have nothing to lose and a lot of control to gain. Let me know how it goes!

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