October 28, 2011

Is the Envelope System Right for You?

So you’ve taken the first step in getting a grip on your finances and you’ve set up your budget.  As hard as that was to do, you may realize that creating your budget was actually the easy part.  The hardest part of a budget is sticking to it, and for many the envelope system is a great solution.

With the ease of banking online, automatic drafts, and check cards, it can be very hard to keep track of your spending.  How many times have you looked at your bank balance with skepticism because you simply don’t remember spending all of your money?  A quick stop at Starbucks hardly registers as spending because that swipe of your debit card at the register is so easy.  The pain (and panic) comes later when you realize you’ve overspent and don’t have enough money to make it to the end of the month.

To guard yourself against overspending, try using the envelope system to manage your money. The concept is very simple:  On payday, you cash your check and divvy the cash into spending envelopes.   The envelope system is a very hands-on way to spend your money, and about as low tech as you can get.

How the Envelope System Works

  1. The first step is to put together your budget.
  2. Next, take legal sized envelopes and write one budget category on the outside of each envelope.  One envelope may be labeled Groceries, another might be labeled Electric, and so on. The point is to have one envelope per spending category. Thus the “envelope system.”
  3. When you get paid, cash your check and put your budgeted amount into each of the envelopes. You can even use a cute wallet to hold your envelopes.
  4. The envelopes control how much you can spend for every category of your budget.  If your food budget for the month is $600.00, put $600.00 into the envelope marked groceries.  When you go to the grocery store, take from the envelope however much cash you’ll need for the trip and leave the rest safely at home.
  5. You can move the cash from envelope to envelope as needed. For instance, if your grocery envelope is empty but you still have $50.00 left in your electric envelope, you can move the money from electric to groceries.
  6. You can adjust your budget categories as you see how much you are actually spending for any given category.  Any money left in the envelope system at the end of the month can go into your savings account, or maybe even towards a treat for your family.
  7. You may also choose to do a partial envelope system, especially if you have automatic payments set up at your bank for things like your mortgage payment.  If that is the case, you’ll need to be very careful when removing cash from the bank for your envelopes.  It wouldn’t be very helpful if you removed too much cash and, as a result, you didn’t have enough money to cover your mortgage payment.

The envelope system does take a little bit of extra planning, but it is a great way to get a realistic view of your spending habits.