The concept is pretty simple.
- Look at your budget and see what can be paid in cash. Label envelopes with those categories (tithe, groceries, clothes, restaurants, etc.) and the number you’ve budgeted for it. For example, $150 on groceries.
- Whenever you receive your paycheck, go to the bank or an ATM and take that money out.
- Then go home and drop the cash into its assigned envelopes: Tithe, Groceries, Clothes, Restaurants, etc.
- When the money in the envelope runs out, it has run out and you’re done spending on that category.
Give yourself some flexibility at first. It takes some time to get your numbers right. But if you stick to this, you’ll find yourself saving money and controlling it better.
Remember, the key to budgeting is to give each and every dollar a job.
What you can’t pay for in cash, you can put into virtual envelopes by using Simple’s Checking Account. Because of Simple, you can use the envelope system for EVERYTHING. I do and it keeps me in complete control of every penny. You can read my rave on Simple. I keep track of every expense (cash or debit) with the EveryDollar app.
Pros and Cons of the Envelope System:
- No overspending. What you have in each envelope is finite and once it’s gone, it’s gone.
- Back to the basics. This will cement your new spending habits and help you build a solid foundation in money management.
- Psychology. Dave is right that handling cash seriously affects your impulse to spend. It’s so easy to swipe a credit card. It’s so hard to hand over the Benjamins.
- No overdraft. Also, Simple doesn’t charge overdraft either. Seriously, there’s no reason why you should ever have to pay that ugly fee ever again.
- ATM and/or bank visits. Yeah, it’s annoying, but it’s necessary.
- Learning curve. It’ll take you a bit to figure out how to pay for things while you’re fumbling with your envelopes at the cashier’s line. No worries, it gets easier and you’ll find a way that works for you.
Tips on the Envelope System:
- Try an accordion folder instead of having individual envelopes.
- Don’t bring all the money you’ve budgeted when you go out. If you’ve budgeted $100 on restaurants, you don’t have to bring the full amount when you go out to eat.
- Whatever’s left over in the system should go to savings or to reduce debt. Rolling it over is another option, but I recommend using it for savings or towards debt.
- Writing on the back of the envelope after every expense in that category so you can see at a glance how much you’ve spent and what’s left.