This is a guest post from Andrea Horn, a personal finance instructor, mom of two boys, and creator of Recession Proof Living.
Want to get out of debt and start building wealth? Then grab some envelopes and get some cash out of the ATM, and start taking notes. I’m going to tell you about an old-fashioned method of money management that doesn’t get nearly enough respect in the age of Quicken, Mint.com, and online banking, but is in many ways faster, tangible, and more convenient. It’s called (drum roll, please) The Envelope System.
How Budgeting in an Envelope Works
The Envelope System is simple. You decide on categories that will be useful to you, such as groceries, entertainment, gas, or clothing. Decide how much you want to spend on each one for the month (or week, if you prefer). Write the name of one category on each envelope. Put the designated amount of cash in the envelope. Voila! You are now ready to spend. When you buy groceries, pay for it with money out of the Grocery envelope, and put the change back into the Grocery envelope. Ditto for all the others.
When Envelope Budgeting is Practical
The envelope system works well for items that can be easily purchased with cash. Food, clothes, gifts, gas, movie rentals, and even larger items like furniture and electronics work well with envelopes. In addition, anything that tends to become an impulse purchase in your household should be put on the envelope system. In my family, that means soft drinks, books, and magazines.
When it’s Not Practical
Some items cannot be easily purchased with cash. For example, it is almost impossible to make a mortgage payment in cash. Luckily, mortgage payments are not usually an impulse purchase! The same holds true for utilities and other bills that must be mailed in or paid online. No worries, just write a check or use your bank’s bill pay service for these items. You don’t need an envelope for every item in your budget, just the ones that make sense.
How to Tweak It
When my husband and I first tried using envelopes, we had a lot of arguments about how to spend the Entertainment money, especially if one of us spent some without us discussing it first. We learned to avoid conflict by having a separate Entertainment envelope for each of us, with equal amounts of money, of course. We also learned never to take the Clothing envelope with us unless we were planning to buy clothes on that trip. It’s too easy to dip into the clothing fund when you run out of fast food money. . .and then have nothing left over for clothes.
Here’s another tip. If you’ve never tracked your spending before doing the Envelope System, estimate on the high side for the first month, especially for food. We ran out of grocery money the first month we tried the system because we had no idea how much we really spent.
We also started using envelopes with our son’s money, one each for spend, save, and give. You will have to experiment with various options to see what works for your family. Good luck!
Envelop Budgeting Discussion:
What simple accounting systems have you used to stay on budget?