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The Envelope Please: A Guide to Hands On Money Management

June 23, 2007 by Rachel
How much cash is in your wallet or purse RIGHT NOW?  If the answer is little to none, you are not alone.  Increasingly, Americans rely on plastic (debit or credit) for their day to day financial transactions, even the small ones.  I cannot prove it, scientifically, but it occurs to me that, as we have become more and more physically separated from our money, we have gone further and further into debt.  If that is true, establishing (or re-establishing) a physical connection to our money should help improve our finances. The simplest and most common method of staying "in touch" with our money and our budget is THE ENVELOPE SYSTEM.  Just as it says, it includes an envelope for each spending category in your overall budget.  When you receive a paycheck, you put a specified amount of cash (whatever amount you have budgeted for that category) into the envelope.  When you make purchases, you use cash from the envelope that corresponds to the appropriate spending category.  When the cash for that category is gone, you either have to shift money from another envelope (spending category) OR you have to wait until you get paid again and have the money to add more cash to the envelope.

ADVANTAGES OF USING AN ENVELOPE SYSTEM

  • There is a regular, physical connection (touching and handling) of your money.

  • You have constant access to your money.

  • It allows you to evaluate your spending before you spend it.

  • Numbers don't lie!  If the money isn't there, you cannot see it and you do not have it to spend.

  • It limits "impulse" purchases.

  • It can be customized to fit your specific budget and spending categories.

DISADVANTAGES OF USING AN ENVELOPE SYSTEM

  • Security

  • It is less convenient.

  • It involves more consistent record keeping.

WHAT YOU NEED TO SET UP AN ENVELOPE SYSTEM

  • a written budget

  • envelopes or folders

  • labels

  • a safe location to store the envelopes (cash)

TYPES OF ENVELOPE SYSTEMS

  1. TOTAL CASH - This means you pay cash for ALL SPENDING CATEGORIES (mortgage, car, utilities, food, clothes, supplies, etc.).  It is only possible if you have local payment centers for the bills you owe AND/OR you are able to pay with money orders or certified checks.

  2. PARTIAL CASH - This allows you to use cash for the spending categories where your expenses vary (food, clothes, household supplies, entertainment). 

  3. ONLINE BUDGETING SYSTEMS - This allows you to have an electronic version of an envelope system.  Because this takes the physical connection to money away, I would only recommend this to people that have excellent discipline in their spending habits AND that have already spent time using a manual envelope system.

TRACKING SPENDING WITH AN ENVELOPE SYSTEM

  • Keep ALL receipts, even the little ones.

  • Label each receipt with the appropriate spending category and store it in the envelope/folder for that category.

  • Subtract the amount of each transaction from the amount in the envelope AND keep a running written balance for each category.  You can track this balance on the outside of your envelope/folder.

  • Write in pencil!  You WILL have to move money from one envelope to another and this will help with your records.

  • Evaluate your spending in EACH CATEGORY at least once a week.

KEEPING YOUR ENVELOPE SYSTEM SECURE

  • Limit the amount of cash you have in the envelopes.  Especially for some of the larger spending categories, only keep 1-2 weeks worth of cash in the envelope at a time.

  • Don't talk about it in public.  If people hear you discussing cash that you keep in your home, you could become a target.  Even if you are storing a small amount of money, you don't want someone to be willing to harm you to get it.

  • Invest in a home safe where you can keep your cash.

  • Put your cash in an "unlikely" place in your home.  Your desk or your office is the first place someone will look so find a place that is not so obvious.

I encourage you to try using an envelope system and see if it helps you follow your budget more closely.   Make it fit your needs and use any money left in your envelopes at the end of the month to buy yourself a treat!