The money envelope system has got to be one of the best ways to keep your family budget healthy.
This system has been around for many years but now it is a very popular strategy that Dave Ramsey is widely known for.
The strategy involves putting money for expenses into envelopes in order to keep track of your spending.
The system works really great for those who struggle to stay within budget each month.
If you have never tried this before I cannot recommend it enough.
What is the money envelope system?
The money envelope system works using cash in envelopes dedicated to particular expenses. This is what makes it so genius.
Today most of us make purchases using a debit or even worse credit cards. Using cards to spend money makes it really easy to spend money.
It’s a psychological thing.
Spending money without physically seeing it is easy to do. We’ve all done it countless amounts of times.
Spending money that you can literally see and touch is much more difficult to do.
No one likes to see money disappearing right in front of them. It makes us uneasy.
To effectively use the money envelope system you have to put cash into individual envelopes according to what you spend on.
Other expenses that are fixed should not be a part of the money envelope system, such as a mortgage, car payments or health insurance.
- How a sinking fund can get you out of trouble
- 9 Budgeting mistakes and how you can fix them
- 5 Financial mistakes millennials need to avoid
***Please note that this site uses affiliate links if you would like to read the legal stuff you can find it here
My family personally uses this system ourselves and I can truly say that it works.
We have saved so much money by using this method.
I’m not really a big spender but I like to keep an eye on how much physical cash I have on me. I’d much rather see my envelope shrink rather than have to rely on checking my bank balance each day.
I’m a busy mom and ain’t nobody got time for that!
How to start your cash envelope for budgeting
For this to work, you have to make a note of all the things you spend money on each month.
It might be helpful to pull out your monthly budgeting spreadsheet at this point to see where your money goes.
Here is an example:
Envelope 1 Groceries – $600
Envelope 2 Gas – $50
Envelope 3 Eating out – $150
Envelope 4 Internet – $30
Envelope 5 Gym – $20
Envelope 6 Coffee – $25
What you would do now is to take an envelope for each of the separate categories and write the name of the budget and the amount on the outside of the envelope.
You then place that amount of money into each of the individual envelopes.
The idea here is to stay within the budget of each envelope and not go over it.
As with any system, there are always going to be positives and negatives. Let’s take a look at some of these:
Benefits of the cash envelope system?
1. It helps to keep your budgeting on track
2. It stops you from making impulse purchases
3. It forces you to plan out your spending before you start the month
4. You become more mindful of your spending
Negatives of the cash envelope system
1. You can’t easily keep track of your spending
2. You might not like carrying so much money all at once
3. You can lose out on cashback rewards
4. It may not be safe to hold on to so much cash at once.
Does the envelope system work when you make payments online?
Yes, it can work but it takes a bit more effort and discipline on your part.
You would have to write the expense and the amount on the envelope and keep an eye on the spending.
Personally speaking, I would just avoid all of that and keep track of it on my monthly budgeting spreadsheet.
Whilst the aim here is to keep track of your spending by using cash. I think it would be wrong to overwhelm yourself to the point where you won’t want to do it anymore because of the amount of work involved.
Make your life simpler not more complicated!
Other potential pitfalls in the money envelope system
If you are not the only person that does shopping or pays for things in your household then the envelope system could become a bit of a problem for you.
You would either have to distribute the cash among you or come to an agreement on what you each spend on.
Try not to borrow money from other envelopes. Doing this will only put you into difficulty in other areas.
It may seem very tempting but you must avoid it.
The point to the money envelope system is to help you to make a budget and stick to it.
This is one of the reasons that you should always set realistic budgets
If you underestimate your budget it is inevitable that at some point the cash will run out. It will do you no good.
If you want to stick to the proper rules of the system then once the money in your envelope is finished – that’s it.
Helpful tools to get you started
If you want to give the cash envelope system a try you can purchase some envelope wallets from here. They are a great way to keep track of your spending.
If you would rather get something a little more convenient and more permanent you should consider getting one of these wallets.
Final thoughts on the money envelope system
The truly great thing about the cash envelope system is that it causes you to instill a spending discipline that you otherwise may not have had.
It’s a great way for families to get better control of where money goes each month.
Although there are many positives to the system I don’t think that you should be afraid to tweak it slightly in areas so that it works better for you.
- Good money habits that can improve your family lifestyle
- 15 Dave Ramsey tips that can turn your life around
- 9 Tips for getting out of debt when you are completely broke