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September 23, 2014

Envelope System

If you need help sticking to your budget the Envelope System works wonders. It is a proven statistic that people spend more money when paying with credit cards and debit cards verses paying with cash.  When you are paying with cash you are more likely to think about what you are purchasing. 

How does it work?
You create envelopes for different categories of your budget: Groceries, Entertainment, Clothing, Vehicle Registration, Vacation, Christmas, etc.

You then place the amount you have allotted in your budget for each category in cash in each envelope.  For example, if your budget has you spending $400 a month on groceries.  If you are paid once a month when you receive your pay check you place $400 in the grocery envelope.  If you are paid twice a month than $200 from each paycheck goes into that envelope.  When you go to the grocery store, take your grocery envelope and use only that cash, once the envelope is empty that’s it, no additional spending on groceries for that month. 

Using the envelope system makes your budget more visual and more hands on, you are aware of the money in the envelope dwindling each time you spend from it.  You see in the middle of the month how much you have left to spend on groceries, which will encourage you to plan better to stretch those dollars.  Instead of just swiping your debit and credit cards whenever you stop and not having any idea of what you are spending on food until the end of the month.

If you have debt you want to pay off or if you are on a limited budget, I believe the envelope system is a must.  Working the envelope system will help you stick to your budget.  A great part is, say you budget to spend $400 a month on groceries, but one month you only spend $300, with that left over $100 you can apply that towards your debt.  If you have no debt, and don’t see how you can save for vacation, then when you have that leftover $100 you can put that in a vacation envelope.  Using the envelope system will cause you to try to think out of the box on how you use your money, so you can have more of it left over to spend on the fun stuff. 

Another thing to keep in mind when using the envelope system is each time you spend out of your envelope, you should keep the receipt in the envelope, this way, you can track on your actual budget sheet your actual spending.  I have seen people also write on the back of the envelope, the date and amount they spent in that category, but then each month you need to use new envelopes if you write all over it, that is why I have placed the receipts in the envelope until I sit down each week to go over my budget and write those expenditures on my budget sheet.  Another tip is to use different colored envelopes for each category, this way it’s easy to tell the difference between each one. 

Part of using the envelope system is to curb your spending and instill discipline in your spending habits.  Do not steal or “borrow” from the other envelopes.  If you have spent all your grocery money for the month but want to go to the store, don’t borrow money from the clothing envelope.  You will thank yourself in the long run, when you need back to school clothes or need a new outfit for an event you are attending, and you actually have money set apart for clothing. 

If you are debt free, don’t eliminate yourself from using the envelope system, it’s a great way to plan and prepare for things that you don’t necessarily pay every month, but still need to plan for like Auto Registration Renewals, and Annual or Quarterly Insurance Premiums.  When that annual or quarterly bill arrives, you have money set aside for it instead of having to come up with that bigger payment all of a sudden.  It’s also a great system to set aside money for gifts, when you or your children are invited to birthday parties you have money that you budget each month to spend on gifts. 

I encourage people when desiring to use the envelope system to start with just a few categories.  I think the best categories for this system are groceries, gas for your vehicles, and your entertainment budget.  You don’t necessarily need an envelope for your utilities as long as you prepare for that in your bank account and on your budget sheet.  This eliminates the extra work of withdrawing cash for your electric bill, then re-depositing that money, to make your payment.  If you will use the envelope system for at least the items you use your debit card for and credit cards for, you will see the difference it makes in your spending habits.  This way you don’t have 50 envelopes but a handful to manage.   

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