The envelope system is a very easy, simplistic way to budget. It not be very sophisticated, but it can be very effective, especially when it comes to spending money.

For those who may not know, the envelope system is just as it sounds. You take the money that has been budgeted for various categories out of your checking account and put the cash in different envelopes, each earmarked for spending on the designated category. Again, maybe not very sophisticated, but simple and easy to use.

There could be a number of different reasons you may not like this system of budgeting. It can be inconvenient. Paying with cash can lead to awkward counting out of bills at busy checkout counters, or carrying around a pound of change in your pocket or purse. Also, it can mean an extra trip to the bank or ATM to pull cash out, especially with so many people able to direct deposit their paychecks. Maybe you would see it as embarrassing. After all, who pays with cash anymore, so when all your friends pull out their Visa’s, you are shuffling singles around trying to count out how much to leave for a tip.

Even with all the possible reasons you may dislike the envelopes system, it can be a very effective way of budgeting. Even for the most financially secure, keeping control of spending cash can be a challenge, especially when the credit card gets pulled out left and right to cover things.

Say you have a weekly entertainment budget of $100. You go out on Tuesday night with friends, armed with your credit card and the plan of spending no more than $50, since you know you’ll be going out again on Saturday. You go out to dinner, then a movie (with a drink and popcorn thrown in). Then it’s out for coffee after. You pull your credit card out each time, not really thinking. By the time you get home, you realize that you’ve spent $60, $10 more than you planned. No big deal, you’ll just spend $10 less on Saturday. But you don’t. You spend $60 again without really realizing it, making you $20 over budget for the week. Maybe not the end of the world, but that was $20 that you were going to spend on something else that you no longer can.

Now let’s take this example using the envelope system. You take $50 cash with you on Tuesday, leaving $50 in the envelope for Saturday. You skip the appetizer at dinner to make sure that you have enough cash for the coffee you were planning on getting after the movie. At the movies, you opt for the smaller drink and decide to split a popcorn with your friend to save a few dollars there. Then at the coffee shop, you decide to skip the pastry so that you have a few extra dollars to add back to the envelope for Saturday.

Both of these scenarios lead to a great night out. Using a credit card, you went over budget without planning to. Using the envelope system, you didn’t go hungry from being too frugal, and you still treated yourself to dinner and a movie with friends. Plus you still have your budgeted amount for your next evening out with a few extra dollars to add to it as well.

It can be very easy to lose track of spending when you are using credit cards. They’re too easy to use, and unless you sit there and count up all your receipts as the night progresses (which you most likely won’t), you won’t know that you’re going over budget until it’s too late.

This post was inspired by a post over at Get Rich Slowly by Kristin Wong: “Adventures in returning to the envelope system.” After leaving the envelope system behind because she felt “financially independent” and that she could do without it, Wong returned to using the system after deciding she had lost control of her spending, especially in the area of dining out.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.
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