Committing to a budget can be difficult as you adopt new habits of tracking and balancing to ensure you stay in control of your money. But at the end of the day, adding and subtracting numbers in a spreadsheet doesn’t give you much accountability for your spending habits. This is where the envelope system can become valuable.
The envelope system basically consists of using envelopes and cash to divvy out your spending. Each envelope contains an allotted sum of cash assigned to a specific expense. Once the cash is used up, then you’re prevented from spending more money on that specific expense.
Essentially, the envelope system helps you from overspending in certain areas, and it can be a useful tool for tracking and sticking to your family budget. Here are some tips for adopting the envelope system.
Determine your actual expenses
Use your previous months’ bank statement to paint an accurate picture of how much you spend in each area, like groceries, gas, eating out, etc. Using your total discretionary income, subtract each expense from the total monthly income to make sure you’re living within your means.
Once the cash is in the envelope, that’s it. You don’t’ get any other money for groceries, gas, etc. If you notice you’re running low on gas and out of cash, but still have a week until the next paycheck, find someone to carpool with or take the bus. Over time you’ll learn to consolidate trips to the store or accumulate fuel points to save on gas without going over budget.
Obviously, unavoidable expenses may cause you to spend more money than is contained in a specific envelope. However, the more creative and disciplined you can be, the more likely you’ll be to stick with your budget in the long and short term.
Learn true value
When you have to fork out the cash for a purchase, your mind sees a clearer picture of how that purchase affects your budget. Swiping a card is easy, but when you’re taking out almost all of the cash allotted for clothing on your first purchase, it’s easier to feel a greater sense of accountability for that money and your budget. And again, don’t hesitate to put it back if it costs more than the cash you have in the envelope.
Trial and error
Don’t expect to get it right the first time. You may find that you genuinely needed more grocery money even when you were using coupons and being frugal. That’s okay. Modify as needed and try again the next month. You’ll learn to strike a balance and shift things around if needed. The important part is using the cash and not going over, which adds the bonus of no overdraft fees. If you have to dip into the “eating out” envelope for groceries, that’s okay; just make a note of it and adjust it for the next paycheck.
Save the unused cash
The best part of the envelope system is the rewards. What do you do with any extra cash in the envelopes at the end of the pay period? First, you should determine to use that money to pay off debt or save. But you should also opt to reward yourself. Be reasonable, of course. But deciding on a reward in advance will give you motivation to come in under budget and learn to find creative ways to save money.