Here is a Method That is Helping Newly Frugal Converts Get Out Of Debt: The Envelope Budgeting System

As I discussed in my first post for this section of the site, I recommend making as many purchases as you can each month in cash. That’s right–real paper money, not the abstract concept of cash that makes you think you are using cash when you use a debit card. I don’t have a problem with debit cards, of course, since they aren’t credit cards and they can be convenient. But sometimes, they’re a little too convenient, and you end up using them more than you should.

Let’s review the reasons you need to use cash:

• When you use cash, it is much more difficult to buy things unconsciously. Even if you are constantly checking your bank records online, it is tough to track your daily expenditures with any kind of accuracy. If you were to write down every cent you spend, kind of like a food diary for money, that might work, but it is labor intensive. When you use cash with the envelope system, it is kind of like having individual meals delivered to your house, if we are to extend the diet metaphor–once it’s gone, it’s gone. The envelope system takes the work out of it.
• It is more traumatic/physically painful to spend cash than it is to use a debit card. Think about it–if you’re using a debit card, you’re not constantly adding up the stuff in your cart the way you do when you have a finite amount of cash with you to pay for your items. You are less likely to throw in a couple impulse items at the register if you’re using cash than if you use a debit card.

The Envelope System: How To
Here’s what we do at the Right-Click household:

1. Once the paycheck clears each month, I figure out how many budget items we can use cash for in the month and add up to get the total amount I need to withdraw from the bank. I also usually think about how I want the cash to be given to me (how many 20s, 5s, 1s, etc.), so that I have an answer when they say, “how do you want that?”
2. I come back from the bank with all of the cash, and then go through the budget line by line, filling envelopes for each category (groceries gets $XXX, baby supplies gets $XXX, and so on). Each category gets its own envelope, and is labeled on the outside.
3. The envelopes are then kept in a specific area, so that whomever needs the money can get it when they need it. Often, I carry around the grocery envelope in my purse, because I’m constantly at the grocery store and Mr. Right-Click doesn’t usually have time to go shopping. As much as possible, I try to keep the envelopes in the central area at home, rather than carry with me–again, because you cannot spend what you do not have.
4. When an envelope runs out of cash, then that’s it for that category for the month. This is why it’s often helpful to put separators on some of the bigger categories, like groceries, for each week. The grocery envelope carries a monthly amount, say $600, but then I’ll use paper clips to separate it into four $150 sections, so I can track it per week.

Here are some other assorted tips for the envelope system that I’ve gathered over the past five or so years I’ve been using it:

• Grab a bunch of envelopes from the ATM at the bank to use for your budget categories. The envelopes tend to get destroyed kind of quickly and it’s pointless to try to make them look pretty (although I have tried, trust me).
• If you are the only one using your envelopes, you can experiment with other means of separation. I used a coupon organizer
  for my money at one point when I was single and didn’t need to have the envelopes kept in a central area for anyone else to use.
• Another idea for somebody who is hesitant to use envelopes: use different colored paper clips for each budget category, then put all of them in your wallet. This method is more complicated, because you have to remember what each color stands for, and again, I don’t recommend carrying all of your cash around all the time. This is not for safety reasons–it is because I don’t want you to spend it!
• It is much easier to have your numbers all worked out before you get to the bank. Know exactly how much you want to take out, and exactly what denominations you want. For example, with the grocery budget of $600, you want to take that in four one-hundred dollar bills and four fifty-dollar bills (as opposed to six one-hundred dollar bills), so that you can break it up by week. Doing this at home will make it much easier and exact. After a few months, when your budget is somewhat regular, you’ll get to the point where you already know these numbers without working it out.

4 Comments TWEET THIS Share On Facebook EMAIL THIS