Using the envelope budget system is an inexpensive way to make your money last longer. Wondering how the envelope system works? Here you go!
Does your money end before the last day of the month? Frustrated because your temptation to go out to eat eclipses the amount you need for groceries? Or worse… your utility bills?
Take charge of your money with the envelope budget system.
Before you start the Cash Envelope System
It’s exciting to learn how to budget with a system that really works! But before you begin, let’s understand how the envelope budget system works.
Made famous by Dave Ramsey, the envelope system is a way to keep track of your budget without complicated spreadsheets or expensive apps while staying safely within your spending limits.
The basic idea is… when you run out of cash in your envelopes, you stop spending money in that category.
How the Envelope Budget System works
Using the envelope system is very basic, but don’t let the lack of sophistication stop you.
1. Start by creating a budget and decide where you struggle the most.
Generally, we stay within our budget by having our bills automatically drafted from the bank account. But, our family has the biggest problem with groceries and entertainment. If any money is in the bank, it’s easy to ignore the upcoming drafts and head out for Mexican food.
So, instead of running the risk of overdraft fees, we stop by the bank after payday and get a specific amount of cash out for those categories.
RELATED: If you struggle to know how much to budget for each category, check my recommended budget percentages.
2. Gather five to ten envelopes, depending on the number of categories you have selected.
Popular categories for using the cash envelope system include:
- Out to Eat
- Hair and Beauty
- School Lunches
Write the category on each envelope and plan to keep them in a safe place.
I rarely carry our cash budget system with me. But, if you would like to keep the money in your purse, you can purchase a cash budgeting wallet at Amazon.
3. Go to the bank.
Consider the number of pay days per month and the amount of cash allotted to cash budgeting.
Divide the total amount of money allowed for each budget category by your number of pay days in that month. That is the amount you will place in each budget envelope
For example, if you planned $500 for your monthly grocery budget and get paid twice during the month, you will place $250 in the grocery budget envelope after each pay day.
When you have multiple envelopes, keep a running list of the amounts you need for each envelope. At the bank, be specific with the denominations you need.
If you need 5 twenty dollar bills and two fives, ask for it so your money can go into the correct envelope immediately, avoiding the temptation to overspend.
The teller will not think twice about why you are breaking up the money into various amounts. And, if he knew, he would probably be happy to help!
4. Stick to spending what is in the envelope.
The whole point of the cash envelope system is to exercise your will power.
Once you have spent the money allocated for groceries, you cannot spend money from the other envelopes. You cannot default to using a credit card.
Using the envelope budget system does takes discipline and self control.
Keep up the Cash Budgeting habit
It might take time to adapt to using the envelope budget system, but it will get easier.
When you go to the grocery store, you will take your envelope for groceries.
When you get gas, you will take your envelope for gas.
With time, you will find that paying cash becomes a habit. A very good habit! And your budget will thank you.
RELATED: If cash budgeting seems tiresome, read Budgeting Made Easy with Prepaid Cards