One of the simple budgeting tools that my wife and I have found very helpful is the use of envelopes for categories for which we use cash. So how does this work? What is the “envelope system”?
Let’s use groceries as an example. We’ll say I get paid every two weeks, and I’ve budgeted $200 every 2 week period for groceries. As soon as my paycheck hits my bank account, I simply withdraw $200 from my account. I then take that $200 cash place it in an envelope and write the word “Groceries” or “food” on the envelope. Now this is the key. We don’t buy any food that isn’t paid for out of that envelope and we don’t use the money in that envelope for anything but food. And really that’s all there is to it. So what’s so great about using envelopes?
I see 3 major advantages to using the envelope system.
- No more guessing what we have to spend.We always know exactly where we stand simply by looking in the envelope. This was huge for my wife. I am usually the one that pays the bills for our household. We do talk and she knows generally where we stand financially. However, before we started using the envelopes if she was planning to go grocery shopping she’d always be asking me how much we had to spend. She loves the fact that now she knows. She simply looks in the envelope and if there is $100 there she can shop one way vs. if there is $20 left that needs to be stretched to the next pay. There’s no more guessing.
- Helps keep us on budget.Before we started using the envelopes we just used our debit card to pay for groceries. The problem was if there was money left in the account we tended to spend it. You could always rationalize spending by saying: “well, it is on sale. I know we get paid next week, but it won’t be on sale then. It is a good deal after all.” Etc. We humans are always good at rationalizing. By using envelopes and putting a set amount in each pay period, you know exactly what is dedicated to groceries. It was when we started using envelopes that we really started making progress on paying off our debt.
- You spend less with cash.There have been many studies that have shown that people spend less money when they use cash. Spending cash affects the brain in a different way than swiping a card does. It literally triggers the area of our brain where pain is registered. This one was a real eye-opener for me. We had discussed using envelopes for 2 or 3 years before we actually decided to give it a try. I was absolutely convinced that using envelopes and cash would make no difference in our grocery spending. I felt like we were fairly frugal in our spending already and spending cash wouldn’t change a thing. I vividly recall on more than one occasion looking in our grocery cart and saying “There is absolutely nothing in that cart that we wouldn’t have purchased regardless of whether we used cash or a debit card”. And do you know what? I was 100% wrong. When we started using envelopes and cash, we found there were things we didn’t buy. It really has changed our spending habits, and I don’t regret it a bit.
So, if you are thinking about giving it a try, where do you start? What should you use envelopes for? You really should keep it fairly simple. This doesn’t need to be complicated. You don’t need an envelope for every category in your budget. For example, you don’t need an envelope for each of your utility bills. You just pay those as you normally would have. We used envelopes for three categories.
There are other categories that some people have used like Gasoline, Auto Repairs, Home Repairs, School/Activity fees. Probably, others you could think of. Each person’s situation is different. You need to decide for yourself which categories work for you. Just don’t over complicate it.
The bottom line is I really think this is an extremely useful tool for managing your budget. I was a real doubter at first, but it really did make a big difference in our family.
I challenge you to give it a try. Choose a trial period. Do it for 3 months. If you decide you don’t like it you can always go back to the old way. But I bet once you try it, you won’t go back. If you decide to give it a try post a comment and let me know how it is going!