The Envelope System Explained

The envelope system is certainly nothing new. In fact, it’s has been around for decades. Yet many people still don’t know exactly how it works. Do you need to save up money to get started? Does every bill get paid with the envelope system? And on and on.

Let’s break it down.

Getting Started You don’t have to save up any money to start using the envelope system. It goes like this: Let’s say you’ve budgeted $500 a month for groceries. When you receive your first paycheck of the month, withdraw $250 from your bank account and put the cash in an envelope. On that envelope, write “Groceries.” No money—and we mean no money—comes out of that envelope except to pay for food at the store. If you go food shopping and leave the envelope at home by mistake, turn the car around and go back to the house to get it. Make sure to take enough money to cover your groceries for that trip. If you take $150 but you tally up a bill for $160, take some things out of the cart. Put any change back in the envelope.

Use the envelope system for items that tend to bust your budget. Common examples include food (grocery store), restaurants, entertainment, gasoline and clothing.

When you get paid again, withdraw another $250. That’s your $500 for the month for food. If you want to go to the store but don’t have enough money, then raid the fridge for leftovers. Use the envelope system for items that tend to bust your budget. Common examples include food (grocery store), restaurants, entertainment, gasoline and clothing. When the money runs out of each envelope, don’t spend any more until the new month starts and new money goes in there.

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Easing Into Envelopes It can be tough enough to live on a budget if you’ve never made one before. Recording and tracking your expenses is a lot to wrap your mind around. For that reason, you may not want the extra strain of adding envelopes to your new spending plan. That’s understandable, but remember: The envelope system is a tool to help you with the budget. It’s like training wheels on a bike—you don’t need to learn how to use both the bike and the training wheels. Instead, one helps you with the other. Try this: The first month you use the envelopes, use them for just one or two categories. Let’s say gas money. A trip to the gas station is simple, and you are only buying one thing while you’re there. Plus, you probably go once a week or so. At the start of the month, set aside half of what you plan to spend on gas for the month. If it’s $200, then take $100 from your paycheck at the beginning of the month and put it into the envelope. Write “Gas” on it, and you’re good to go. When you make a trip to fuel up, take the envelope with you. Pump, pay, and keep the change. When you go out for more gas in a few days, grab the envelope on your way out the door. When you get your next paycheck, take another $100 from it and put it in the envelope. Then you’re set for the rest of the month.

Once you get into the flow of that routine, look at other categories where an envelope can help you. Some of the most common are:

• • • • •

Groceries Gasoline Clothing Entertainment Eating out

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Don’t Cheat on Your Envelopes Be careful not to borrow from other envelopes. When it comes to the envelope system, it can be very tempting to borrow cash from one to fund some other activity. For example, if you use up all your “Eating out” money, don’t be surprised if some inner voice tells you to reach behind that envelope for the one that’s marked “Clothing.” You must remember that the very purpose of the envelope system is to curb your spending and teach you discipline. When you run out of grocery money, you eat leftovers instead of going food shopping. If you see your gas money is slipping away faster than the remaining days of the month, then limit your trips or even carpool.

You must remember that the very purpose of the envelope system is to curb your spending and teach you discipline.

If you have a crisis come up in the middle of the month or something happens and you absolutely have no other choice but to shift envelope funds around, then call an emergency budget committee meeting with your spouse. Talk to each other, figure out the best course of action, adjust the budget, and agree on it. Both of you must be involved; it’s a committee decision.

Reward Yourself If you have money left over in an envelope at the end of the month, congratulations! You came in under budget for that item that month. So for that, it’s all right to celebrate (within reason). Reward yourself in whatever way you like. If it’s your grocery money, maybe you go out to dinner or roll the money over to the next month so you have an extra-big food budget. Getting that reward is important because it keeps your spirits up. It’s tough to live on a beans-and-rice lifestyle. But you’re making it work! Great job!

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Paycheck Frequency The secret to pacing yourself with the envelope system is to correlate your paychecks with your money. In other words, if you spend $400 a month on groceries and you are paid weekly, then each week pull $100 out of your paycheck and put the cash in an envelope. That will help to ensure that you pace yourself well throughout the month and don’t spend too much too soon. It would be frustrating to spend $400 in three weeks and find yourself with one more week to go and no food money to spend. If you have an irregular income, you can still use the envelope system. The If you have an irregular keys are how frequently income, you can still use you get paid and the total amount you spend for the the envelope system. month. Let’s use food as an example. If you earn $4,000 a month and budget 10% of your income on food, that is $400 a month. If your mid-month paycheck is $1,000, take 10% of that ($100) and put it in your “Grocery” envelope. When you get your other paycheck and it’s $3,000, take 10% of that and put it in the envelope. Remember, though, you have to make that $300 last beyond one pay period. Since your other paycheck is smaller, you’ll need to make sure that both paychecks combined will feed you for the whole month.

Non-Monthly Expenses The envelope system can also be used for non-monthly expenses. For example, if you want to spend $1,000 on Christmas, then write “Christmas” on an envelope and start socking away a predetermined amount of money each month from your budget. If it’s March, you have 10 months to save, so put $100 a month into the envelope. Not only can this help you keep track of your spending, but by starting to save so early, you have almost the entire year to Christmas shop. If you see a good gift for someone in June, you can purchase it and not have to think about it during the holiday season.

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When Not to Use the Envelope System While the envelope system is great for keeping your expenses in check, there are some times when it’s better to go another payment route. For example, don’t use envelopes when you are paying bills through the mail. That is, if you mail a check to pay your water bill, don’t mail cash instead. Someone could see the cash in the envelope and take it, and you have no record that you made the payment. You are simply stuck with a late bill and stolen money.

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Also, don’t keep your emergency fund (baby or full) in an envelope in your home. Your emergency fund needs to be liquid, but it doesn’t need to be so liquid that it’s just sitting in your house waiting for a pizza man or a burglar to get it.

Change in the Envelopes If you spend enough cash, it’s a given that you will have a lot of coins after a while. That can be a pain to carry around an envelope that is heavy and tearing at the seams. Once you accumulate enough change, it’s fine to swap it for bills to make it easier to carry the envelope around. You may choose to dump the change in a coin-counter machine at the store, but we don’t recommend that because the machine charges a fee. More money spent at the machine means less money you have to buy food.

Keeping Receipts It’s all right to keep receipts from your purchases if you want to track your spending, but it’s not necessary. Since all of your clothing purchases come from your “Clothing” envelope, it’s not hard to determine what that money was spent on. For the sake of simplicity, you can throw away your receipts from the previous month when you start a new one—as long as you don’t need them for tax purposes.

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You’re Set to Win! Here is the most exciting thing about making a budget (other than taking control of your money, obviously). The envelope system and a budget teach you discipline, and when you get that sense of control over your money, that discipline and feeling of power tends to spill over into other areas of life. Once you see you are winning with money, it convinces you that you can win in other areas as well. You may start shedding pounds, exercising more, or putting more energy into relationships, jobs and ideas you have. Your life improves, which makes you want to keep going and do even better. It’s called a cycle of excellence, and it’s out there waiting for you! The envelope system and budget are just the start you need to get there!

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