How to Use the Envelope System

“The Envelope System” is an age-old way of saving and budgeting money and prioritizing spending. It was most recently made popular by Dave Ramsey, a personal finance guru. On his website, Dave Ramsey mentions that the envelope system was also his grandma’s way to handle money. If you find yourself constantly overspending, or finding yourself in a financial bind whenever you have an emergency, you may want to try using the envelope system.

Things You'll Need

• Sturdy envelopes (preferably colored)
• Markers

Instructions

1. The first thing you need to do when starting the envelope system is to count all of the money you bring in, taking note of how often you are paid. If you were paid weekly, you would distribute money into your envelopes weekly. If you were paid monthly, you would put money in your envelopes once a month.

2. You also need to write down all of your expenses. They would include rent or mortgage payments, car, insurances, power, phone and cell phones, gas and electric. You also need to write down credit card payments and loan payments. While most people are accustomed to budgeting for these items, they fail to budget for clothing, food, entertainment, gasoline, car repairs, savings, emergencies and mad money. The best way to figure out what all of your expenses are is to look at your bank statements and receipts for the last 6 months, or to follow your future expenses for a month or two.

3. Purchase a pack of envelopes and write down the each expense item, as set through the previous exercise, on the front of each envelope.

4. As you are paid, separate your cash into each envelope paying the set bills like house and car first, and dividing the balance among the others such as clothing, car repairs, and entertainment. You need to put something into each envelope. If you neglect your emergencies envelope, for instance, when you get a speeding or parking ticket, you will have to borrow from another envelope to pay that bill.

5. Each month, pay your bills and expenses using the money saved in that envelope. If you planned your system correctly, you will know how much money you have each to spend for each. Place the receipts from the expenses inside of the appropriate envelope to help track spending.

Tips & Warnings

• You can deposit your paycheck, pay your set bills such as mortgage and car payments out of your account, and use the envelope system to manage your expenses that vary each month such as groceries, clothing, and entertainment.

• You can put the change from each purchase in a piggy bank to put save and you can put any leftovers form groceries or entertainment at the end of the month into a savings account.

• You can also use unused money to pay off your debt.

• If you would prefer to not carry cash or keep it in the house, you can deposit your money and put fake (monopoly) money in your envelopes. Remove the “money” from the envelopes as you spend it. You can then spend according to how much “money” you have in the envelopes.

• Envelopes for items such as car repair, and emergencies should be allowed to accrue continually until the money is needed. Do not empty these envelopes at the end of the month if the money is not used.