How to Use the Envelope System to Manage Finances
I’m a believer in the Envelope System to help those of us struggling to live below our means. If we’re overspending by using credit and/or debit cards, we need to remember that Cash is King. The Envelope System returns the King to his throne so that we can regain control of our spending.
Here are a few basic steps to follow.
- Identify and make a list of monthly household expenses that cannot be set up on an automatic payment plan. E.g. groceries, entertainment, fun money, dining out, date night/entertainment, gasoline, gift giving, vacation, recreation, etc… These expenses will be included in our Envelope System.
- Choose an envelope-like receptacle where we can store cash and coins for each spending category we’ve identified in Step 1. Plastic pouches and small boxes or drawers work fine, but it’s called the “Envelope System” for a reason.
- Determine how many bills in each denomination we’ll need for each of the categories in Step 1 and for all of them put together. We’ll want to know this for Step 4.
- The day we get paid, withdraw cash from our financial institution account in the monthly amounts and denominations identified in prior steps.
- Use only the cash stored in these envelopes for the purchases to which they correspond. We should not shuffle money back and forth between envelopes.
Keep in mind that we should not use the envelope system as a replacement for short-term savings accounts or long-term investment accounts. I included Vacation money in Step 1 thinking of a one-night or weekend get away. Larger vacation funds should be placed in a financial institution account (savings, CD, money market, etc.). Having large amounts of cash lying around is unsafe and will likely lead us to spend it on other purposes.
If our Envelope System doesn’t work the first month as we were hoping, we need to keep trying. It might take three or four months to get it down and running smoothly.
Finally, if we stop using the Envelope System because we feel we’re back in control of our finances, don’t feel bad about going back on it if our spending starts to increase again. The System is a great friend who has our financial back anytime we need it.