You may have heard of the envelope system but do you know how it really works? I will explain how to use this money-saving method so you can live within your means each month.
Shopping for gifts, huge grocery bills and travelling can take a serious toll on your bank account. Now that the holidays are over, your thoughts may have turned to budgeting so you can get that bank balance back into shape.
Enter the envelope system.
How does the envelope system work?
Label separate envelopes to reflect different categories of expenditure that you have. After pay day, place an allotted amount of cash into the envelopes to spend on the various categories each month. For example, you can have envelopes labelled groceries, gas and entertainment. If you have absolutely no clue how much you actually spend each month, it’s a good idea to track your expenses for a month or two before you start this method. Your bank statements will come in handy here.
If the idea of using the envelope system for every category that you spend money on does not appeal to you, then try it for items that tend to blow your budget. For me, that category is food. I hate to cook but buying meals adds up real quick! (Not to mention, they’re not always healthy.)
The idea behind the envelope system is not to deprive yourself but simply to teach yourself to control your spending.
The first rule of the envelope system is that you can only use cash. Yup, you read that correctly. No cheques, no debit cards and no credit cards. What makes this system so effective is that you can see how much money you actually have to spend. You lose this visual cue when you use cheques or cards and this leads to overspending.
The second rule is that you can not take money from one envelope to use in a different category. This may be a little tough at first. It can be difficult to determine how much money you need for some categories like groceries. You may need to tweak your numbers a little but be mindful of what you are spending your money on. If you are blowing your grocery budget buying expensive cuts of meat frequently, then it may be time to make some adjustments. The general idea is, though, that once the money from one category is gone, that is it!
If you go to the supermarket and you have forgotten your grocery envelope, then you should delay your shopping until you have it. This might sound harsh but the system is designed to help you to change your mindset about money.
When To Break The Rules
In the event of an emergency, you can certainly shift the money within your budget around. If you have a family budget, however, make sure that you discuss this action with your other half first and that all parties agree.
How Does The System Help You To Save?
Well, first of all, you are working within a set budget and not just spending freely. You have taken the time to work through your finances and see how much you can afford to spend. This process also helps you to determine where you need to cut back.
As I mentioned before, using cash makes your budget tangible. The visual reminder helps you avoid impulse purchases because you know when the money allotted to a certain expenditure is gone, it’s gone. You will have to wait until your next pay-day to top that envelope back up.
No credit card means no interest fees. Credit card interest is ridiculously high and once you avoid using the card, you eliminate this unnecessary payment. It also means that you are not spending money that you don’t have which is a major reason people use credit cards.
What To Do With Leftover Cash?
If, at the end of the month, you have money left over in one category, you can do several things with it:
1. Let it roll over to the next month so you have a bigger budget.
2. Use it to reward yourself. A reward is great because it will keep you motivated. Being strict all the time is tough!
3. Pay off debt, if you have any. Even if it’s just a small amount, you will be able to pay off that debt faster.
4. Add it to your savings. I don’t think I need to explain this one.
Disadvantages of The Envelope System
Even though, this is a system that has worked for many, it does have a few disadvantages:
1. It may be confusing at times. Say you go to a big box store that sells groceries, clothing and other items that you may have separated into different categories. Which envelope do you take the money from? There may be a learning curve at first but over time, you will figure out what works best for you.
2. No credit card rewards. Credit card companies often have points and various incentives to encourage you to use their products. When using this system, you won’t have much need for credit cards so you will accumulate fewer points.
3. This method can be challenging if using for an entire family. If you and your spouse are sharing a budget, then you need to make sure you both stick to it. Try splitting the money for each category in half and combining resources toward the end of the month. Alternatively, you can designate one category for one person to be in charge of. For example, the person that does the cooking for the family can be in charge of the grocery budget.
4. It may be difficult to keep track of several different envelopes. If you don’t want to buy an envelope system, try using a small accordion folder such as this one to house all of your envelopes. You can also store a small notepad and pen, receipts and coupons in the folder as well.
Saving money requires discipline and it is not always easy but when you start to see savings accumulate, I bet you’ll be happy that you stuck to your budget.
Have you ever tried the envelope system?