Winning at Life: The Envelope System

Our Money Month
Hey Everyone! Today was the start of our family’s money month. It’s the day we reset the budget, look at how we did, make decisions on what to change, and start over fresh. So, I thought it would be fun to talk to you about our system for managing money and one that hundreds of others use as well.

 

Resources
While there are tons of tools available through books, websites, and apps that can help you budget and track your spending. The one I prefer is the simplest and arguably one of the most effective because it creates accountability to sticking to your plan.

 

If you haven’t heard of it, it’s called the envelope system. Here’s how it works:

Step 1: Create your budget

  1. Determine your monthly income
  2. Create a category for each of your expenses
  3. Based on the income you have available, determine how much is needed for each expense. Your total should always come out to $0. Income minus expenses = $0.

Step 2: Take one envelope for each category of expenses that changes month to month

Step 3: On each envelope, write the category name and the dollar amount you decided on for that expense

Step 4: Figure out how much of what you need for each envelope (10 – $100s, 7 – $50s, 10 – $20s, and 30 – $10s)

Step 5: Get cash from your account for your expenses and place that cash into envelopes based on the amounts you’ve determined for the category

 

How it Works
As you go through your month, you will use the envelopes to keep track of your remaining balances for each category. You should NEVER take money from one envelope and use it for another category because then you won’t have enough for that other category. You should ALWAYS use cash for purchases (except possibly reoccurring expenses such as utilities, house payment, car payment, insurance, etc.) Here’s what an example budget might look like with each category marked as either envelope or none.

 

Category Amount Envelope/None
Income $1000 None
Expenses $1000 None
House $300 None
Car $100 None
Groceries $200 Envelope
Clothing $50 Envelope
Savings $20 None
Miscellaneous $130 Envelope
Utilities $100 None
Vacation $100 Envelope

 

It’s Easy!
This is an extremely simple example and in real situations you’ll likely have a higher income and higher expenses, but it illustrates the point. The budget helps you create a plan for your money. The envelope system helps you execute that plan.

 

If you don’t track expenses and don’t control your money, it will disappear and you’ll have no idea where it went. If you follow this plan or another one like it. You will control your spending and build for the future.

 

Why the Envelope System?
The benefits of the envelope system compared to others, are that you are held accountable through the envelopes to only spend what is in those envelopes. You do have to be disciplined enough to say, “Alright, I’m down to $0, that means I’m done spending for the month in this area”. Spending cash is also more difficult than swiping a card which is also a benefit of the system because it keeps you from spending as much as you would have otherwise.

 

Be Disciplined
Though there are other resources for managing your money, making a budget, and tracking expenses. The lesson to take away from this post is that you must be intentional with your money. The envelope system combined with your budget not only helps you do that, but also forces you to be intentional by going through the process of taking out cash and setting up your envelopes. It changes your mindset and approach to money. It also creates the higher levels of discipline necessary to say “Hey, maybe I don’t need that extra Starbuck drink this week”. Once you’ve developed that discipline, you will start to see things turn around with your money. It won’t just disappear, you will own it, and you will know where every dollar you earned, went during the month.

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