Question: Should I use the envelope system to manage my money? What exactly is it and how does it work?
Answer: In a world where we are asked multiple time per day, “Will that be credit or debit?” it’s hard to imagine using a method as simple as the cash-based system to manage your money.
The idea of paying with cash only may seem outdated but it’s an effective and simple way to get control over your money and successfully stick to a budget. For those who are just learning to budget their funds or for folks who just want to keep a closer eye on their money, the envelope system may be the perfect solution.
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"Never spend your money before you have it."
- Thomas Jefferson |
The envelope system is a method of managing money that centers on a specific and detailed budget. Once your budget has been established, you will divide your expenditures into your most common categories.
Keep the categories simple and try not to create too many different categories. Try to limit the categories to no more than five when you begin.
Determine the budgeted amount of cash for each category and place the cash into labeled envelopes. (You do not have to use actual envelopes. A coupon wallet with marked dividers works just as well. The point is to keep the money separated into categories.)
As the cash is spent, replace it with your receipts so that you can track your spending and continue to fine-tune your budget later. If you feel you need a “mad money” or emergency spending envelope, that’s fine. Just make sure that amount has been accounted for in your overall budget.
Once the cash for a particular category is gone, the spending in that area is done for the month (or pay period). This means no trips to the ATM and no bringing out the credit cards when the cash is gone.
Try not to take money from one envelope to refill another. That will just confuse your careful budgeting. However, if you do take from one to add to the other, be sure you make a note in each envelope so you can properly account for your spending behavior when creating next month’s budget.
Using the envelope system will require a bit of self-discipline. You may make some mistakes in the first month or two, but don’t give up. Learn from your mistakes, go over your receipts to see if you need to make budget adjustments and remain committed to the process.
You may notice that it will be harder to spend cash than it is to swipe your card. Cash is tangible – therefore it’s harder psychologically for us to give up cash – but for some reason it just doesn’t “hurt” as much when we use plastic. Go figure!
There will also be expenses that are either difficult or impossible to pay in cash, so make allowances for these in your master budget. Keep a close eye on the dates that each bill is due so that you will still have money in that envelope on the due date.
If any cash remains in a particular category at the end of the month you are encouraged to do one of two things with the extra cash. Either place the additional funds into an interest-bearing savings account to build up your emergency fund, or use the money to pay down existing debt.
Using the envelope system may take some forethought and self-control, but the benefits of using a cash-only system cannot be denied. This is a proven way to better manage your money and to begin developing good spending and saving habits for a brighter financial future.
"Do not accustom yourself to consider debt only as an inconvenience;
you will find it a calamity."
- Samuel Johnson |
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Debt is NOT your friend. It's not a wonderful "tool" for building wealth. That's a myth.
