Using the Envelope System to Control Spending

by Joe on January 26, 2010

Before we went through the Dave Ramsey’s FPU series,  if you would have suggested to me that i can use cash in an envelope to manage spending, i would have told you that you are out of your mind.

Needless to say, the envelope system for managing money has worked tremendously for us in the last one and half years. We divide spending money into categories- our most popular categories are gas and, groceries. At the beginning of each month, we cash the allocated category amount and stash them in envelopes labeled by category name. By so doing we avoid swiping cards debits or credit on the gas pump or on groceries stores. This also forces some money discipline, and makes goal setting real.  If we have to eat out, we get the groceries money. Once it’s over… it is over!

How Envelope system works

Begin with a budget.
This is the basic concept of money management and since we are talking about basic money handling concept, you have to know how much money you have, and how much you plan to spend. If you need a budget spreadsheet, please download free worksheets here.

Decide on your cash categories.
Once you have completed and have agreed on the budget content with your spouse if you are married, divide it into areas of spending: groceries, gas, clothing, miscellaneous, etc. Create an envelope for each category, if you are beginning, just get a plain envelope and put some columns for date, description, amount, and balance. I find that this layout on the envelop helps to tracking spending.

Cash your categories money
Fill each envelope with the money that you’ve allotted to that particular category on your working budget.

Spend the grandma style.
This means you spend when you have to, and you pay for your purchases out of the allotted envelope. We prefer to buy groceries at the beginning of the month – such that a romantic dinner in the middle of the month will not take us back to swiping bank cards for groceries.

Carry over any left over money to next month budget.
If you have any money left in your envelopes at the end of the month, reduce your budget category by the same amount. This also means that you have extra cash left over to bump up your savings or kick some debt off.

Repeat from step 1 next month.
By doing it over and over, you are developing a habit that will become a lifestyle free of debt.

Time is of essence here and Dave Ramsey says that

 it will take a few months to perfect your envelope system. Don’t give up after a month or two if it’s not clicking. You’ll get the hang of it and see how beneficial the envelope system is as you dump debt, build wealth, and achieve financial peace! See … simple!

More on Envelope System

You think this is crazy? Yes it is and grandma had no debt!

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