One of the popular ways to stick to a budget is by divvying out cash amongst labeled envelopes. The labels correspond to your necessary expenses, savings goals, play money, etc. There are a few advantages to the Envelope System:
- Those who do better with the physical representation of money can visually see where the money is going.
- You can’t over-spend with this system. If the envelope is empty the spending is done.
- It eases the temptation to dip into savings. Since you’ve already allocated the money there, you have to make the most of your play money
Budgeting with the Envelope System has been around for a long time, but Dave Ramsey seems to be a notable proponent. Envelopes are very well suited for his target audience, people who have amassed a large amount of debt (see the second point above about not over-spending).
How does the Envelope System work?
I already explained how it works above, but here’s a video that walks you through it. In general people use the Envelope System because they are visual… so what better way to learn it than a video? This Envelope System video tutorial is from No Credit Needed (NCN):
Disadvantages to the Envelope System
I don’t use the Envelope System myself. Why? There are a few reasons. I simply don’t use cash when I can get reward points on my credit card (and pay it off every month). I’m not one to do a lot of work (hence the website name) and I’m not sure what I’d do with the money for utilities in cash when a check is required. Am I supposed to go back to bank and deposit it? Also in the video, NCN suggested carrying $400 in cash around with you all month. I know you could just carry $100 for the week, but wow, that’s a little more cash than I like to carry.
This is probably just the right time to note that there are a few online systems that help you manage an Envelope System. I’ll try to cover some of those in the next few days. Your bank may also allow you to have sub-accounts. That’s really helpful because you can then funnel money to a vacation account or a new car account – perhaps even schedule deposits to go there automatically each month. Years ago my bank didn’t allow for this. However, since it was bought out by Bank of America, I should look back into it. Sub-accounts would be a great Lazy way to implement the Envelope System.
Do you use the Envelope System? If so, how has it worked for you? Do you find it a lot of work or does just take a minute or two a day?
(Note: You may have also heard or read about a jar budgeting system. As far as I can tell it’s the same as the envelope one, but it’s attributed to Secrets of the Millionaire Mind by T. Harv Eker. Expect my article on microwave container budgeting any day now. I follow that up with one on cereal bowl budgeting.)