Getting Started on the Envelope System

After I read the Total Money Makeover by Dave Ramsey in May, we really started getting serious about being on a budget. We had previously heard of the envelope system (a system where you use only cash, and each budget category has an envelope with a budgeted amount of cash in it), but at that point in our lives we were quite skeptical about using only cash. We didn't really believe that using envelopes would be any different than using our debit card- we wanted to change our finances, but thought using cash required too much weekly effort.

In July of this year, we decided to give the envelope system a fair chance. We made out our budget for the month based on what we spent out of our checking account the month before. I decided in the budget how much I was going to need for each category of cash spending: gas, groceries, and miscellaneous (which included clothing and gifts). For the monthly bills, we write checks and use online bill pay as much as possible.

The consumer in me wanted to purchase a tool to get started on (read: reward myself for using) the envelope system. Dave Ramsey's website has a beautiful *deluxe* envelope system that holds everything. But before purchasing it, I decided I was on a new path- a frugal one, where it was ridiculous to spend $20 on envelopes! Instead of spending money on it, I decided to ask for extra money holders they give you at the bank.

So off to the bank I went. I added up the total of spending categories for the two week period and wrote a check to cash. I asked the teller to break it up into the amounts I noted on the check. I ended up with three separate envelopes with different amounts of cash in each.

Taking care of the logistics of the envelope system turned out to be the easy part. The next two weeks of existing without using a debit card was a challenge to the lifestyle I had lived since I opened my first account at 16.

Instead of an easy swipe to spend money, I was seeing it leave my envelope. I felt like a middle schooler finally spending their hard-earned allowance. I had forgotten what spending money was really like. It was so much harder to give up $20 in cash for gas than it had been on a debit card.

Using the envelope system for those first two weeks really changed my perspective about spending. Since we had already planned our budget for the month, I knew that the money in that envelope was just enough to cover two weeks worth of expenses. Not spending money became a huge priority, because I didn't want to run out.

Now that we have been using the envelope system for a few months, I wouldn't go back to using my debit card. There are occasions when we have to use it because we haven't been to the bank after payday, and I hate it because I feel like I don't know how much is there to spend, and then I have to figure out how much less cash I should get in each envelope. Cash has gone from being inconvenient for us to being the most convenient option for us.

We have made some mistakes along the way- like not budgeting enough money for the month- but using cash has certainly reaped great rewards in our finances. We spend much less money than before and I am much more careful to find the best deal so I don't waste our limited weekly cash supply.

If you haven't used an envelope system before, I would definitely recommend trying it for at least one pay period. Once you start using cash envelope system along with a budget to control your spending, you will really start to see positive results.

If you are just starting out using an envelope system, here's how to get started based on what we learned:
1. Make a realistic budget based on the previous month's or pay period's expenses.
2. Categorize your cash expenses (for us it was gas, groceries, and miscellaneous- other categories might be entertainment, clothing, dining out, gifts, etc.).
3. Go to a bank or ATM and get cash. Place it in envelopes according to category.
4. Spend money only out of the envelopes. When it's gone there's no more to replace it (this is the hardest part!). Any money left over each week could stay in the envelope or go to savings, another category, or debt reduction.
5. Repeat 1-4 every pay period- as soon as possible after each paycheck so you aren't tempted to spend with your debit or credit card.


Susan said...

Sounds like you're doing a great job! Here's a tip that made the envelope system easier for me. I struggled for a couple of years with tyring to manage two weeks at a time. I was always running out of money before the second weekend.

After getting married I found it much easier to budget our cash weekly, letting the leftover money accumulate each week if I don't make it to the grocery store or something. I get our cash either late Thursday or Friday since I do most of the shopping on the weekend.

I'm also a lot more comfortable because I'm carrying less cash each week and I can plan better for one week than I can for two. Just watch out for those 5-Friday months like November!

Mandy said...

Thanks Susan, that sounds like a really good idea- funny I never thought about splitting it up like that but I think it would help me out so much. It's hard to see 2 weeks in advance! Thanks again!

Anonymous said...

Try these. They are so much nicer to pull out than envelopes!