The envelope system is a classic way to track spending and reduce debt because it works.
By using the envelope system, you can easily plan and keep track of how much you are spending within a specific category. You budget a logical amount for each category – groceries, entertainment, gas, clothes, and so on. Add it up and then head to the ATM and take out that amount in cash. Then, divide up the cash for each category and put it away into labelled envelopes. You know exactly how much you have spent on those items or activities based on how much you have left in your envelope. Don’t have enough in your grocery budget? Put back the overpriced wine. Want to see a second movie? You might have to wait until next month. When you’re out, you’re out.
What if I usually pay for things using card or online?
The envelope system is designed more so for making purchases in a store rather than online. Haircuts, dinner dates, and oil changes are all things you can budget for and bring your envelope. However, this system can still work for online, but you will need to do some extra bookkeeping to ensure you never go over budget. Since you have the amount you budgeted for written on the top of your envelope, you can allow for a certain amount to be spent on your card online. Just be sure to write down exactly what you spent on that category on top of the envelope like quick bookkeeping and don’t go over.
You can also track your spending using virtual “envelopes” or folders on the computer, in something like Excel or Mint.
What if I have money left over?
This isn’t about punishment, however. If you get to the end of the month and you still have grocery money, use it to go see that movie. But don’t move money around until you know for sure you won’t need the money budgeted for the category you take it from. Only do this if you don’t make it a habit. Many people find that they would rather use the money on that category only, and if there is some cash left over in any particular envelope, they can roll it over into the next month. If you really budget your entertainment or travel budget for a bit, and rollover the money, you can save up for a bigger concert or vacation.
Another amazing thing to do with your leftover money is use it pay down any debt you might have. Remember, the goal is to pay off your credit card in full each month, or pay it down as much as possible to avoid high interest rates. Most people also have college debt and a mortgage or car to pay off. Every little bit that you have left can go to freeing yourself from debt or high mortgages and interest rates. An envelope system gives you so much clarity in terms of how much you spend, how much you can save, and how quickly you can become debt-free by staying conscious of all areas of spending in your life.
It’s so easy to overspend on certain categories, the biggest for most people is probably food and going out. Having a cash envelope budget that you stick to will help you evaluate what you’ve been spending your hard-earned money on and you might even get more creative in the kitchen in the process by planning meals and using ingredients you may not have thought of before. Also if food keeps going bad, you might want to reevaluate your waste and overspending regardless.
It is a tried and true way to stop your overspending all together! You may even discover that you need less money than you budgeted and reduce or raise certain budgets accordingly. The point is to leave within your means and evaluate what you choose to spend your money on. Then the things you do spend your money on will provide more joy, because you know you can afford to enjoy it and the activity won’t be cutting into the rent and electricity and other predictable costs you already know you need to prepare for.
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