Is the Envelope System a Good Budgeting Method?
If you have heard of Dave Ramsey or read anything budgeting-related, you have probably heard of the envelope system. There are many ways to budget your paychecks, but the envelope system can be one of the most effective methods ever. Let’s dive in to determine if it’s the right choice for you.
What Is the Envelope Budgeting System?
The envelope system is a simple budget system that allows you to separate your money into envelopes dedicated to specific things. For instance, there is likely an envelope for your rent or mortgage, your electric bill, and your water bill, but we will get to those details in a moment.
While it has gained a lot of popularity in recent years, it is actually an old school budgeting method that dates back to when people used cash instead of cards for bills and purchases. And though our society views cash as outdated in many ways, the envelope system is as effective for modern life as it was in days gone by.
There are several things to like and dislike about the envelope system. The following are a few common ones.
Pros
Forces you to make conscious decisions- intentional spending only
Cuts down on overspending and unplanned splurging
Lowers credit card bills
Cons
More trips to the ATM or bank
Takes time to get used to
Can be inconvenient in some cases
How To Start the Envelope System?
Setting up your envelope system is as easy as 1..2..3..
Step 1: Prepare
This is a very simple system to start. All you need is:
1. Envelopes or Something Similar
This can be regular letter envelopes, homemade envelopes made from construction paper, manila envelopes, zippered bank bags, zippered pencil bags, or anything else that you can put money in. You just need several of whatever it is.
2. Your Written Budget
I am going to assume that you already have a working budget that you can work from. If not, it’s time to make one. You have to have a plan for your money. Otherwise, you are not going to know what you need the envelopes for or how much you need to put into each. Once you have that budget, you can get a good start on the envelope system.
3. Writing Utensil
A pencil or pen will do, but you can use markers or anything else. Personally, I like to color code or decorate my envelopes so they are easy to tell apart when I need to pick one. That’s not required, of course, but feel free to be crafty if you want.
Step 2: Organize
After you have your supplies, you very simply write each category of your budget on an individual envelope. Some people keep it simple and just write “Utilities” on their envelope to cover their electric, water, and gas bills.
Others have a separate envelope for each individual category. I find it more effective to have a different envelope for everything for a big reason: Motivation.
Separate envelopes mean I need less cash in each of those envelopes, so I see my progress more quickly. Let’s say all of my utilities come out to $600 for that month- $200 each. Having one envelope means that if I look in the envelope and see I only have $100 in there, I might get discouraged or overwhelmed.
If, however, I only need $200 in each envelope, putting $100 in one of those envelopes lets me know that I have half of a bill covered. Yes, I still need $500- the amount has not changed- but there is a psychological and emotional reward when you see yourself making progress.
Truthfully, though, how many envelopes you have is up to you. You have to find what works for you, and that usually takes some time to do no matter what system you use. You will find a way to make it your own.
However you choose to label your envelopes, there is something important to remember: This system is not going to work unless you add in everything you spend money on. That means that in addition to your bills, you have envelopes for any debt you are working on, your grocery allowance, your savings goals, holiday shopping, and literally anything else.
No budgeting system works effectively if it does not include every category, including your spending budget. Otherwise, you will end up spending bill money on something you did not plan. To be safe, you should also add an envelope for “miscellaneous” because something always gets overlooked.
Step 3: Decide Where to Keep It
Okay, let’s be clear on something. You are about to be keeping cash in envelopes. For obvious reasons, you need somewhere safe to keep these envelopes.
If you live alone, you can probably easily keep them in a shoebox or a drawer without worrying about roommates stealing from you. However, thieves can still break-in.
The best thing to do is find a good hiding spot that you can access pretty easily while no one else can. You can get a small safe from Walmart or another retailer for less than $50 that you can keep them in.
There are, of course, more expensive options, but I can say from experience that the small ones are very handy.
How To Use Your New System?
You are all set up and ready to go. Now, you just need to put your envelopes to work.
Fill Them
On payday, you hit the bank or ATM and take your cash out. Go home to your envelopes. Do not stop at the mall or your favorite pizza joint- not yet, anyway.
When you get home, you put the designated amount of money into the right envelope. We are going to keep it simple and say that you have envelopes for your utilities, groceries, and rent. Each of those bills is $100 so you put $100 into each envelope on payday.
Use Them
On grocery day, you grab your grocery envelope and head to the store. You know that you have $100 to spend, so you head through the store with that in mind.
After you have filled your cart, you realize that your total is $110. What do you do? Hopefully, you left your credit card at home, so your only choice is to put something back.
And that, my friends, is one of the biggest benefits to the envelope system. If you follow the rules- only taking the envelope you need, leaving credit cards at home, and so on- you cannot overspend. Having a set amount of money with you keeps you on track.
How Can This Work For Me?
I have laid out a very simple system here, but you probably have one hundred questions going through your mind because life isn’t simple. You are likely wondering how exactly this simple budgeting method can fit into your unique situation- it’s a valid question. No worries, though. We are going to address common concerns and questions for you:
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I know, I know- paying bills online is so much more convenient than actually going somewhere to pay them. Well, good news: Using the envelope system does not mean you have to let this go.
As long as you can remain disciplined, you can pay for everything you want online. Here’s how:
You still put cash for your bills in your envelopes and leave it alone. When you are ready to pay your bill, you can do one of the following:
1.) Go load the cash onto a prepaid debit card and pay your bill or 2.) On payday, you pay that bill immediately with what’s in your account. You then take the money out of that bill’s envelope and redistribute.
For instance, let’s say I need to pay my $100 power bill and I have the cash in my envelope. On payday, I pay the $100 bill before getting cash out of the bank. When I get home, I take the $100 from the envelope and put it in the other envelopes I need to add money to.
If you are thinking that this sounds too complicated to do, it really isn’t. Like anything new, it takes a little time to get used to it, but once you do, it becomes like second nature. There are alternatives, though, if you just really hate this idea. We’ll get into those in a moment.
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Online shopping can be done just like online bill paying. If you have the money put away in your envelope, you can buy what you need or want online on payday. Then, you just take the money from the envelope and put it towards another bill.
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Oh, I know all about this one. Sometimes- usually when you have no money or when you are trying to control your spending- you will notice an amazing sale. So what do you do if you only have $50 for household shopping on you but you find a good sale while shopping? Well, that’s up to you. You can either:
1.) Spend your household allowance on the sale item and wait to do your household shopping for when you have more money.
2.) Go back home and take money out of another envelope.
3.) Avoid the sale.
Let’s be honest- when you stop to think about it, that sale is probably not as amazing as it seems. They usually aren’t.
The good thing about this system, though, is that the rules are not set in stone. If you feel like that sale is totally worth taking money out of another category, you have the freedom to do that. The point is that it is almost impossible to do so carelessly with the envelope system. You actually have to stop, think, and consider your options instead of being able to just swipe a card and deal with it later.
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One issue people have with using cash is that doing so means they are not helping their credit score. It is true that active accounts improve your credit score, but those active accounts do not have to be credit cards.
Making timely payments on your bills helps credit tremendously. If you make car or mortgage payments, good payment history on them works wonders.
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So many people think that having cash is dangerous. This is not entirely incorrect. Having cash on you can lead to some bad situations, but this is not the only thing you should focus on here.
You should consider just how dangerous it is to use nothing but cards and online banking. Those things can be hacked- cash cannot.
Even worse, if someone does steal your identity or your money online, it could take months for you to notice it. It does not take long to realize you have a $20 missing.
Also, you are not going to be carrying around all of your envelopes everywhere you go. You only take an envelope when you are actually going to use that money- that is what makes the system work. So, yes, you will have a lot more cash than you are probably used to, but you are not going to be keeping it all on you.
Is This System For Everyone?
The envelope system really can benefit everyone, but some things may make it difficult for some people. The following are a few times you might find this system working against you instead.
Cash Burns a Hole in Your Pocket
I have heard this phrase a lot, but I am not sure that I ever truly understood it until I had kids. If they have any cash- even just $1- they have to spend it. When they see it or just remember it’s within reach, they absolutely have to do something with it.
Most people grow out of this- to some extent, anyway- but not everyone. If knowing you have cash in your pocket or in your home tempts you and you are not disciplined enough to say “No”, the envelope system might not be a good idea.
You lack commitment.
Here’s the thing: The envelope system is not a magic solution. You can’t just label the envelopes and think it’s going to work out. No, sorry, that’s not how it goes. For this system to work, you actually have to commit to the process, do the work, and make wise decisions. If you are not ready for that, don’t waste your money on the envelopes.
No Hiding Place
We touched on hiding spots earlier. Some people simply do not have a good place to hide their envelopes. Maybe you have roommates you don’t trust, live in an area with high crime, or something similar. If this is true, it might not be safe to use this old school method. Consider the alternatives below instead.
Share a Budget
What if you are married and each partner actively shops and pays bills? This can lead to one party having the grocery money when the other party is at the store.
If the two of you can sit down and split the bill paying and shopping duties- like naming one person for groceries and the other for paying utilities- then you can still use the traditional system. If you cannot work out an agreement, you will need to try one of the alternatives below.
Forgetful
I am sorry to say that if you cannot keep up with due dates, this system can work against you. You can, of course, fix this by setting reminders, but if you miss your due dates, you will end up paying late fees. If this sounds like you, there is an automated option below.
Go Digital
There are other ways to use the budget system without actually having envelopes full of cash lying around. You can either use these by themselves or create your own hybrid system with the traditional envelope method and some of these.
Digital Envelope System
Again, this system was created long ago, before modern technology changed everything. Now, you can set up digital envelopes with different banks.
I know from experience that Capital One, Chime, Simple, and even PayPal offer the ability to add “goals”, “tasks”, or “subaccounts”, depending on the organization. Basically, they are digital envelopes. You can set up one for each category of spending and transfer money to them on payday.
This option does, of course, require more discipline since the money is still easily available on your account. You can set it up for what you need, though. For instance, have one card that you transfer money to when you need to pay a bill.
For me, this is my PayPal card. The only money on it is the money I need at that moment. The rest is safely tucked away in my other checking accounts. I leave the other cards at home when I need to go out so there is no easy way to use that money. I can transfer it if I want to, of course, but it takes several steps to do so, meaning I have time to rethink my decision.
This is a good option for those who share budgeting with a spouse. Just get two cards for the accounts you use.
Learn Your Budgeting Basics with the Budgetry Store.
Automatic Bill Pay
If you are terrible at keeping up with due dates, set up automatic bill pay and automated savings. You can tell your bank where you want your money to go, where to send it, and when to send it. Then, you just need to make sure the money is there.
You can do a lot with this. You can actually set up different digital envelopes in your checking account for bills and savings. Then, you can set up automatic transfers so on payday, everything goes where you need.
If you set up automatic bill pay on your power bill, you can set that money up to come directly out of your “Power Bill” envelope. With a little work, you can automate it all while controlling your spending.
Conclusion
The envelope method is an effective way to control your budget and practice financial discipline, but no system is perfect. Try using the envelope method, but be sure to tweak it to fit your needs and goals.