Envelopes, Envelopes everywhere!

I’m part of a group on Facebook called Dave Ramsey-Budgeting.  Great group, great questions constantly are brought up where everyone tries to chip in and help others stay on track to get out of debt or get started to get financially free.  One of those big great questions that constantly come up is how do you start using envelopes.  After about the 10th – 20th one I saw posted, I decided to write this.

Let me just start by saying the envelope system is amazingly easy.  It’s only complicated if you make it complicated.  My 3 yr. old daughter has 3 envelopes, “Give”, “Spend”, and “Save”. Obviously as adults, we can’t only have these three, but it’s as simple as you make it and merely taking the money out of your account and stuffing an envelope should never be complicated.

I recommend not using quicken or any “envelope” program to keep track of your envelopes.  It’s been proven we will spend 12-18% MORE when paying by credit card.  If you’re everyday spending is spent on a debit card, you don’t FEEL the pain of your money leaving your pocket book like you do with cash.  If you are going to attempt to use one of these digital programs to track your envelopes you still don’t have the emotional attachment you would with cold hard physical cash.

Let’s get started with envelopes.

Cash Envelopes
First, you need to make sure you’re doing your budget.  Read my earlier post, Do you know where your money is going?, to get started on the budget.  You can’t do envelopes without doing the budget!

Second, look at your budget and find the categories you spend money on on a regular basis.  Rachel Cruze recommends only using envelopes you have a tendency to overspend on, but I would recommend just your regular basis spending.  That being said, I don’t recommend an envelope for mortgage/rent, utilities, or other normal monthly bills.  You don’t overspend on those because you write a check to pay them once a month.  Now, take your budget, mark a star or something next to those categories for your envelopes

Third, get some envelopes or an envelope system like this one: envelope system. Now, label them based on the categories you’ve selected from your budget.

Finally, on payday go to the bank or ATM and fill the envelope with the amount you set in your budget.cash envelope

A few various options you can do to be more detailed with your new system would include the following:

  1. Keep records. If you are using a plain envelope, on the back write down your deposits and withdrawals for the envelope with a running balance. This will help you understand where your money is going and how much you have for each category. Some envelope systems are already designed for this so they have columns printed for you.
  2. Keep the amounts small. I’ve heard a lot of people say they didn’t want to keep that much money on them at one time, which I understand. But, they are thinking about keeping the entire months budgeted amount in the envelope. Instead, try splitting it up if possible between checks so you aren’t carrying the whole amount at one time.  I understand not wanting to go around carrying the $500-$1000 in grocery money.  Even though one less trip a month could save the time and fuel it takes to go to the store, I’m much happier my wife would rather take two trips a month instead of carry a ton of money all the time.  We carry what we need, and that’s what I would suggest to you as well.
  3.  Don’t cheat.  This isn’t really an option as it’s one of the most important rules with the envelope system.  If you run out of money in the envelope.  You’re finished with that category until the next paycheck or next time you plan on putting the money in the envelope.  Don’t pull money out from one envelope like clothes to be able to buy that compulsive candy at the grocery check out counter.  If you absolutely have to have money for something, talk to your spouse or accountability partner to discuss the purchase first.  The point is to have a budget and stick to it, not find loop-holes around the system.
  4. Keep your receipts.  This is a great tool to know what kind of deals you’re getting with spending cash, know exactly how much you’re spending over time, and is helpful if you itemize your tax return.  Writing down your transactions is good, but to know exactly what you spent the money on can be even more helpful in the end.

So that’s it! You’ve successfully started using an envelope system.  As with the budget, you probably won’t get it right the first few tries, but after a few months in, you’ll get it down and be a pro.  I’d love to hear some of your success stories with using cash only and envelope systems.