The envelope budgeting system

One of the classes I'm assisting in this semester at the high school I work at is a personal finance course. I'm really loving it, and I, too, am learning a lot.

Anyways, for about a week now, I've been trying a form of budgeting known as the envelope system. We were learning about it in class last week. The envelope budgeting system has been around for a very long time, and I was already familiar with it before class last week. I just never really tried it myself.

Here's the general gist of the envelope system, along with my spin and take on it.

Typically, the envelope system involves taking physical envelopes and assigning each one to a category of spending. You then place cash in each envelope (how much is up to you), and you only use the cash you have in each of the envelopes for their assigned categories. Once you run out of cash in an envelope, then you're done spending in that category until you can refill the envelope (next paycheck? next allowance day? next month? you decide.).

Now, for bills that you have taken out of your checking account automatically (like car insurance, rent, utilities, etc., etc.), keep them that way. Leave those expenses on autopilot. The envelope system is best used for purchases like groceries, restaurants and entertainment, clothing, gas, miscellaneous odds and ends, etc.

The concept behind this old-school way of paying cash for items is that it limits you to spending only the money you have in the envelope. And the challenge is to spend the money in the envelope wisely, because it's a finite amount. It will run out, if you spend too much, too fast. See, psychologically, it's all too easy to end up spending far greater amounts of money in the long run when we use plastic, whether it be in the form of credit or debit cards, because our minds are telling us that we have more money available to spend. Make sense? So, for example, if I go into a clothing store on a set mission to buy a pair of pants that I need (not want, but need - big difference!), and I have a credit or debit card along with me to make that purchase, it becomes a lot easier to end up purchasing other clothes that I don't need, because I know I have a lot more money, relatively speaking, available to me with the plastic than I would have with, say, a $50 bill in my wallet.



Now, I've put my own unique spin on utilizing the envelope system. I have five envelope categories for purchases. Those categories are: groceries, dining out/entertainment, gas, clothing, and online purchases. But I also created a sixth envelope for a saving category, rather than a spending one. I'm attempting to save 10% of my income. That's right - in addition to trying to better track and manage my spending, I'm trying to intentionally save more by earmarking 10% of my income each pay period.

What's also cool about the way I'm customizing the envelope system for my purposes is that some of the categories aren't very necessary, and that's by intentional design. For example, I don't typically make many online purchases. And I don't buy clothing too often, either. But if I'm socking away, say $50 per pay period, in each of those categories, I could end up with a nice little pile of unspent cash after several months. I can then decide to transfer some or all of it to my saving envelope or to one or more other spending envelopes that tend to be utilized more often.

So far, it's way too early to tell how well this system is working for me or how I feel about it. I am, however, optimistic and excited to enter my second week. It is definitely a challenge, no doubt. I can tell that doing this form of budgeting will certainly require a lot of discipline and patience.  

For more great ideas and insights about using the envelope budgeting system, check out these additional resources by financial expert Dave Ramsey. Our personal finance class utilizes a lot of Mr. Ramsey's material. Awesome stuff. Very practical advice and strategies that you can begin implementing right away.

The Envelope System Explained (podcast)

Dave's Envelope System Explained (written article)