How to Use the Envelope System

Not too long ago, when my husband and I started to get our financial act together, we realized we were spending a ridiculous amount of money on eating out. Wanna know how ridiculous? This is embarrassing… we were spending $400 a month on restaurants! We were having a budgeting crisis in the form of not doing it at all.  It was time to come up with a system. To solve our problem, we learned a trick taught by one of the most famous financial gurus in America, Mr. Dave Ramsey!  This little trick is simple.  It doesn’t involve you going out and getting a second job or even selling some of your favorite toys.  All you have to do is change your money-spending behavior by paying only in cash.  Here is my step-by-step process to explain how to adopt this brilliantly elementary method.

Before you start, create a budget

Doing a monthly budget (or bi-monthly, in our case) means sitting down and writing out how much money you will be receiving and figuring out where you are going to be using it.  Schedule time, the night before payday, to map out where the money will be spent.  Don’t forget anything.  Every penny needs an assignment! Then, you need to give each money assignment a name.  We use categories such as bills, debts, water, phone, groceries, gas, haircuts, mad money, entertainment, date nights, and many others. Making sure every penny is placed in a spending category dramatically cuts down or even eliminates surprise or frivolous spending!

(1) Get yourself an envelope system

You can use whatever cash-management system you like, but I would strongly encourage you to purchase either Dave’s starter envelope system or the deluxe version.  I have been using the starter system for about seven months now, and I totally love it.  It’s been working great, but there are two cons. The biggest downside is that the envelopes start to wear down, but you can always buy replacement envelopes here.  To remedy this, instead of buying more envelopes, I’ve just taped them up.  The other drawback is that the starter system doesn’t hold my checkbook or debit cards.  However, the deluxe version does!  So, if you want more of a total wallet, then going bigger is the right choice for you!

(2) Decide which categories will be CASH ONLY

Now that you have your envelope system, write down your “cash only” category titles in the spaces provided on the envelopes.  Not every category will be cash only though.  For example, we use our debit cards for things like bills, debt payments, hair cuts, phone, and gas. These are categories in which we aren’t tempted to overspend.  We have a very specific amount budgeted which we hardly ever  exceed. Now, think about where you struggle staying on budget and strongly consider using cash for those things.  Right now, we use cash on groceries, eating out, date nights, holidays, entertainment, and mad money.  Food, gifts, and fun are the areas where, if we’re not careful, we will easily break the bank.  So if you decide to budget $300 for groceries, put that much cash in one of your envelopes.

(3) Fill those envelopes

So you’ve budgeted your entire monthly or bi-monthly income and acquired an envelope system; now it’s time to get the cash!  On payday, once the check has been deposited, take out the amount of cash you will need by adding up your “cash only” categories.  With the dough in hand, fill your envelopes with the budgeted money.  Now you are ready to go shopping!  Just kidding….

(4) Spend wisely

Up until now, the whole process has been relatively easy, but now it’s time to be smart.  Dave recommends that you spend money from each envelope and to not borrow or steal from another.  Oh, and when the money is gone, it’s gone for good!  No more spending!  Period. So what might this look like? Let’s say you budgeted $100 for eating out.  You enjoy a few glorious meals away from home, but then you realize the envelope is now empty.  It is a big fat NO NO to steal money from, say, the groceries envelope to pay for a quick meal of McDonald’s.  Nuh uh, girlfriend!  Once each envelope is empty, you are done for the month.  Next month, you can tweak your budget to allow for more or less money.  We do this by collecting all of our receipts, totalling our spending, and seeing where we can make adjustments. Be smart, be wise, and stick to the budget.

The envelope system is your new best friend!

Paying with cash using Dave’s envelope system is a simple trick and it’s so worth doing.  So why is adopting it so important? Knowing how to use this system, and following through with it, will save you so much money in those areas where you might be a little out of control.  So don’t waste another minute.  Get your money to behave, as Dave would say, and start using the envelope system today!