I have gone on the envelope budget at various points during my life. In fact, I did the envelope budget before I even heard of a man named, Dave Ramsey. I want to hop on my pedestal for a second to pass along the fact that Dave Ramsey didn’t invent the envelope budget…I did. Ok..just kidding 😊
But, seriously, Dave Ramsey didn’t invent the envelope budget. Placing the amount of money you should spend for the week in an envelope isn’t exactly rocket science… nor is it worthy of a patent. This is probably how your grandmother spent money. I remember relatives of mine always having an envelope of grocery money. I am guessing they set aside their money for the week so they didn’t have to keep track of how much they spent.
Don’t let this ancient piece of technology fool you. Using the envelope budget is the best way to keep track of your spending, and can easily lead to savings in your pocket.
I recently went back on the envelope budget with my girlfriend, and this is why we did.
It’s impossible to keep track of your spending
You may be like me eight years ago. I was in the finance industry and I thought I was a genius and that I didn’t even need a budget. I thought I knew the amount I could spend each month and I thought I could do some type of Good Will Hunting memorization technique so I could keep track of my spending in my head.
Boy was I wrong. Most people don’t have computers for brains. We can’t even keep track of a list of purchases we made 5 days ago. Seriously, tell me what you spent your money on 5 days ago? I’m trying to think right now, and I have come up with a dinner, coconut water, I think there was a beer in there somewhere. The fact is, I just don’t know. I have my receipts so I can go look up what I spent my money on, but if I’m actively spending money daily, I need to know if I’m over or under for the week depending on what I’m doing for the week.
The fact that I can’t tell you what I spent money on five days ago isn’t a problem when you are on the envelope budget. This is because I can open up my envelope and know exactly how much money I have left for the week. That is what differentiates you and I. I know the cash I have left to spend and you don’t. At the end of the week, if I had to get more cash out, I know exactly what my deficit is for the week. If I have money left in my envelope at the end of the week, I know I saved money.
How the envelope budget works
Seriously, you don’t need to put your money in actual envelopes to do the envelope budget. You can put your money in zip lock bags, you can put it in rubber bands, you can try a potato chip clip… Whatever you want to use, you just need to segment your money for the month. Once you segment your money for the month, you can break the month into different envelopes.
This is how I have it broken down
- Category 1 – Groceries
- Category 2 – Fun
That is it; those are my only two categories. I calculate my fixed expenses and give myself an amount to spend each month on groceries and fun. I take those two numbers and I withdrawal the cash for the month and add them to 8 envelopes. Four of those envelopes are for fun for each week, four of the envelopes are for groceries.
If you have bills that are not paid out of your bank account, you may want to include an envelope for bills you will pay with cash.
This is what my flow of money looks like:
Money left over at the end of each week is aggregated into a savings envelope. As this savings grows, I use this surplus for money during weeks when I overspend. This way I shield my bank account. At the end of the year, the money left in the envelope is how much you came under budget for the year.
Why the envelope budget works
The envelope budget works because it forces you to both calculate your monthly spending and segment that spending. The segmentation allows you to see where you are over spending, and actively seeing where you overspend each week helps you keep yourself accountable.
It also makes you feel pain, since you have to go back to the bank and take out more money when you overspend. This makes it less likely to do want to overspend, and often times helps you come in under budget for the week.
Every time I have gone on the envelope budget, I have personally come out saving a nice chunk of money.
If you are interested in the envelope budget, I highly suggest you try it out. But, you will also need a budget to help you as a guide.
If you want to signup with Stock Street, we give you a free excel budget by providing you email!
Thanks for reading!
I honestly have not heard of envelope budget before. Am I correct to think that your own envelope budget suggests that you are a retiree? It’s not easy not to include mortgage, credit cards, and student loans if they still occupy a big part of your finances. Should I have an envelope for each one of them?
Hi Bernz JP! Thanks for stopping by! That is a great question. I am not a retiree and the system is useful to manage your variable spending – not fixed expenses. When it comes to your fixed expenses such as your mortgage, loans etc… those should be calculated in your budget. You should create an allotted amount you are able to spend each month after you calculate all of your fixed expenses. You can break down that allotted amount of monthly spending as much as you want. For example, you can have an envelope just for your morning coffee, or for late night desserts etc… I personally don’t have it broken down into this little detail. I only have two categories: Fun and Groceries. So, the envelope system doesn’t work well for fixed expenses such as mortgage payments. It does work well with variable spending such as groceries. And the variable spending is where a lot of us end up overspending. Does that answer your question? Feel free to ask any more questions!