Saturday, June 6, 2009

The Envelope System

One of our favorite readers Dave mentioned in on of our earlier posts about using the envelope system for budgeting. Essentially you take out cash (yes I know this is foreign concept) and divide it up into various categories. I decided to try this out this month and so far it's worked very well. We set up a detailed budget with all of our bills and expenses included. We keep the money for our bills in our account and pay those electronically and we do gas on our cards as well. Here are our cash envelope categories:

  • Free money for myself and husband
  • Eating out
  • Groceries
  • Entertainment
  • Pets
  • Car insurance (we pay bi-yearly)
  • Health and Beauty
  • Misc.
So far it's been working out very well. It definitely helps us realize how much we mindlessly spend and think about our purchases more. For instance I'm much less tempted to spend my free money on lunches out when I could instead buy clothes.

Also by taking the cash out ahead of time you don't risk over spending and then not having money in the account when the bills start to roll in.

I'm not gonna lie. It's a bit depressing when you realize how easy it is to go through these envelopes so quickly. We've spend 75% of our entertainment budget and it's only the 6th of the month. I guess we'll be learning to find some even cheaper activities.

All in all its a learning process, but I do enjoy knowing exactly how much I have to spend and feeling confident that we have enough money to pay all of our bills and put a lot into savings.

Anyone use the envelope system and have any tips?

1 comment:

  1. I think one of the most helpful things about an envelope system is that it helps you set thrifty habits! Even if you don't stick with the exact allocations and the actual physical envelopes after a few months, it really helps you to be aware of how you spend your money and think about your spending in that way in the future.

    One key thing, though - DON'T be tempted to borrow from one category for another or borrow ahead from the next month planning to pay it back later - it won't happen, and then you'll just constantly be worrying about it and feeling guilty. If you set limits that prove to be unreasonable, find a compromise for the future that still meets your budget needs but gives you a little more flexibility. There are going to be months where it just doesn't work out, but if you stick with it, the habits really stay with you!