Today we are going to be talking about the infamous envelope system. About a year ago my husband and I decided we wanted to start a budget and give the envelope system a try. Since then it has become a big part of our life in terms of our finances. I often share our personal envelopes with those of you who follow me on youtube and it has come to no surprise that many of you are interested in learning more about the envelope system and where to start.
If you asked someone today what is the envelope system most would probably associate it with Dave Ramsey. While Dave Ramsey is truly an advocate for the envelope system, generations upon generations have been using envelopes to budget ones money for years and years. Back during times such as The Great Depression, many families used envelopes to budget their money. At the time, banks were not seen as safe and families wanted to have more of a handle on their own cash. Just like today they would take money they received from their paychecks and divide it into multiple envelopes for things such as bills and food. Many families hid their envelopes under their bed mattress in order to keep it safe. Today we can keep our envelope money safe a little bit different, but the principle is still the same.
So, what exactly is the envelope system?
The envelope system is simply a way of budgeting ones money with the use of envelopes for different categories. Some of the most common envelopes include food, fuel, entertainment, and eating out.
So why use the envelope system?
While the decision to use the envelope system can vary from person to person, one of the main reasons to use the envelope system is to keep ones budget on track. It has been shown that swiping a debit/credit card is easier then handing over cash. People become attached to cash and using envelopes to budget your money, you always know exactly how much money you have at any given moment. This can help someone from overspending money and make wise choices in terms of what you are actually spending your money on. For example, if you have $10 left in your envelope and still another 2 weeks to go before you put more money in the envelope, it might make you think twice about hitting up the drive through on the way home from work.
So how do you set up the envelope system?
This is probably my number one most asked question when I talk about our envelope system. How do you set it up? Where do you begin? What do you use?
My biggest suggestion I have if you are wanting to set up the envelope system is start slow! Starting the envelope system is really like anything you might want to try. If you have never run before, the first thing you would do wouldn't be to run a 5k would it? No! You would start off slowly, go walking, then turn to jogging, then running, and finally after you felt comfortable with running you may decide to enter a 5k.That is precisely the same thing with starting up an envelope system. I know, I know, you might want to just jump right in and think that in order to be successful with your money and this system it is best to just jump right into it. Honestly, this is the easiest way to make you hate the envelope system and the easiest way to become overwhelmed and frustrated and give up on it altogether. So, start slowly. You need to work your way up to it. Try using only a couple envelopes at first. Maybe even try just one if that seems more approachable to you. The idea is that switching from a card based world to a completely cash based world can be very intimating at first and is enough to scare most people away. If you start out slowly, with just a few envelopes this gives you a chance to really focus on those items and learn the patterns of your spending, what you spend it on, how often you are spending it. It also gives you time to make mistakes and learn how to adjust your envelopes to fit your needs. Once you are comfortable with those few envelopes, add in a couple more, and so on. Keep adding envelopes until eventually you have all the envelopes that you want to have. It takes time and you will mess up, it is to be expected. When you first learned to ride a bike, I can bet that you fell off multiple times before you finally got the hang of it. You didn't give up though right? You kept getting back on even if it was scary until finally you reached that day where you actually learned to ride a bike and it seemed easy and wonderful and was no longer overwhelming. I promise you, that if you keep trying and keep at it with your envelopes you will reach a point where it becomes easy and you don't have to think too much about it, it will just become something you do and part of your routine.
How much money do you put in each month?
Good for you, you started using envelopes and have come up with your categories but now what? How do you figure out how much money to put in? Honestly, the amount in your envelopes will vary from person to person, just like your categories for your envelopes will vary from person to person. I am going to share with you the method that I have found that works for my family, however just because it works for my family doesn't necessarily mean it will work for yours. My method though, can be a starting point for anyone trying to start using this method. If it works for you great! If it doesn't, it at least should give you some sort of idea where to start and how to tweak it to work for you. So what do I do? Some envelopes have a set number every single month, these are part of our basic budget (food, spending, misc.) These envelopes are given the same amount every month and are part of our budgeted expenses. The other envelopes that we use, such as hair cuts, car insurance, AAA membership are figured out using the following method.
Lets say that I need $100 by Oct 1st. (we will also assume we are starting in Jan) This means I have 10 months before I will need that $100. So, I will divide $100 by 10 months. This means I will need to put $10 in my envelope every month for 10 months in order to have the $100 by October.
I use this method for every one of my envelopes. So, make a list of all your envelopes, how much money you need/want in them and when you need that money by. Then divide the amount needed by the amount of months you have to save that money and this will give you the total amount you need to put away each month. Now, sometimes you may not be able to put away money in your envelopes every month, and that is OK. In that case, you need to decide what envelopes are your priority. Paying your car insurance should be more important in terms of saving for opposed to going on Vacation. While a vacation would be nice, if you don't pay your car insurance, you won't be able to drive your car to your vacation spot.
What about an emergency fund?
Having an emergency fund is very important. Especially if you are a home owner or car owner. You can expect things to break and need fixed or replaced. Having an emergency fund set in place can help deal with all the wonderful unexpected events that life likes to throw at you. I suggest everyone have an emergency fund. If you are using the envelope system this would be one of the first envelopes I would suggest. How much money to put in this envelope completely depends on you and what you feel comfortable with, but I would suggest having at least $1,000 in your envelope. However, even if you only manage to put $200 or $400 in your emergency fund that is still money that can help out if an unexpected event should occur. Now with that being said, I would also suggest starting a home repairs or car repairs envelope for when those issues arise. Your emergency fund is a great way to start, but having those other envelopes can help out just as much and lets you keep your emergency fund intact for a "real" emergency.
Where do you keep it?
This is also a question I get asked all the time. Many people say one reason they do not like the envelope system is because they don't feel safe having that much cash lay around the house. My suggestion, invest in a good quality, water and fire, proof safe that is decent in size. Having a small safe might be less expensive and less of an eyesore, but if you have a safe that is easy enough to pick up, if someone ever breaks into your home there is nothing stopping them from picking up that safe and taking it, only to break it open once out of your home. Investing in a larger safe, makes the likelihood of someone being able to carry your safe off with them, a little bit more unlikely.
What happens if I forget the envelope at home?
So, you are using the envelope system, have all your envelopes marked out with money in each one. Good for you right? Well, what happens if you forget an envelope at home and you are out somewhere and that purse is calling your name? There are 3 ways I personally handle this.
1. I try to keep envelopes that I frequently use on me at all times. Envelopes for things such as spending, fuel, and groceries I always have on me. These are my most reached for envelopes. Decide what envelopes your family will frequently reach for and keep them with you. This will help cut back on times that you don't have an envelope that you need with you.
2. I use money from an envelope I already have with me. Lets say I have my grocery envelope on me but not my spending envelope. I see that purse I have to have. I will use money from the grocery envelopes that I have with me and immediately upon arriving at home, I take the money out of my spending envelope and place it back in the grocery envelope (the envelope I borrowed from). I will say I try not to do this too often because it does require you to know how much money you have in your envelopes and can become messy. For instance what if you thought you had $50 in your spending envelope and when you get home you find out you actually only had $30? Mistakes like that can ruin ones budget, so try not to do it too often if you can help it.
3. Same thing goes for #3, try not to do this too often but if needed here is what I do. If I forget my envelopes at home but I have my debit card on hand, I will pay for the purse with my debit card, keep the receipt and once home remove the money from my envelope and place it in my bank envelope. Next time I go to the bank I deposit the money back into our account. This method is generally what we choose to use when ordering online. However, make sure you know how much money is in your bank account before using this method. We don't want to over withdraw from our account. This can lead to hefty fees that we don't want!
Alright, I think that sums up the envelope system. Be sure to watch the video below if you want to learn how to make your own envelopes to use. Printable I used can be found HERE
You can also watch the video for part 1 below.
Be sure to check back next week for part 3 of this series where we will be talking about sinking funds and how to budget using cards instead of cash.
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