I have been using the envelope system since my husband and I started paying off debt. Next to creating the budget, it has been one of the most important systems I used in conquering my debt.
What is the envelope system? It is a very basic method used in parallel with a budget. Within a budget, there are categories. For example: hair care, groceries, gas, restaurants, clothing, etc. You then create and fund an envelope for each specified category. Money is then spent out of that particular envelope (for the month) until the money is gone.
Four benefits of using the envelope system:
1. Break the spending cycle. Many of us get our paycheck, pay our bills, put some money in savings and have some left over in the checking account. Let’s say the amount left over in the checking account is $600. Well, what if I wanted to buy a new dress, buy grocery, get my hair done, purchase gas, and go out to eat a couple of times this month. I could easily overspend by just winging it. With the envelope system, I’ll know at the beginning of the month what I have to spend in each, for example, $200 (grocery), $100 (new dress), $150 (gas), $50 (hair), $100 (eating out).
2. Ease of use. You need envelopes and cash. That’s all. It provides a simple way to keep track of your money.
3. Forces the use of cash (not credit). The only way to stop the vicious cycle of credit card debt is to use CASH ONLY.
4. Better management of your checking account. Have you ever received that dreaded statement from your bank stating that your account is now “overdrawn”? You now have a hefty NSF fee from the merchant as well as an overdraft charge from your bank. So much money is given to merchants and banks monthly due to the oversight of being overdrawn. The envelope system stops this common practice.
When I started using this system, running out of money close to the end of the month was a distant memory. You know the feeling of, ”Oh God, I can’t wait until the next payday”, and it’s a week and a half away. This is a more simple and relaxed method to spend money.
Do you use the envelope system? Have you tried and failed at it? Do you not see the need? I’d like to hear from you. Share your insights in the comments.
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I have used a form of the envelope system in the past. It was an excellent way of managing the household budget. I’m not sure why I stopped but you’ve given me the motivation to start again.
Awesome! Let me know how it goes.
I love the envelope system – I also just set up a virtual envelopes for those occasional but inevitable expenses, such as vehicle maintenance, house maintenance, vet, etc. I use INGs DIRECT savings accounts and they you set up 25 separate accounts. I name each just as I would my envelope – currently I have 13 of them. I can track them in mint.com, earn savings on them and simply transfer money to my checking account from the specific savings account whenever one of those expenses come up. I still use paper envelopes for my monthly expenses as your recommend above. Thanks, Tom
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