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 And though our society views cash as outdated in many ways, the envelope system is as effective for modern life as it was in days gone by.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:

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:

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.

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.

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.