The Envelopes system - How does it work?

[happyslob]

Can someone help me? I've heard of the envelope system of budgeting, but am not sure how exactly it works. Can someone help explain this to me? Is it as simple as allotting a certain amount of money per week (or month) in envelopes for each expense?

Thanks,
Christina

[poundwise]

You might start here...

How to Start an Envelope System (SavingAdvice)

Also...

Envelope System Money Management (DebtSteps)

Envelope Budgeting System (Dave Ramsey)

[happyslob]

Wow, thanks so much for this! This will help a lot. Does anyone use this system?

Christina

[Broken Arrow]

The Envelopes system - How does it work?

Quite well, you'll be happy to know.

[greedy4chips]

Envelope system is a much stricter form of the system my dad used to use...called the wallet system. No money in wallet = no more spending until the next payday. Next payday always resulted in an allowance placed into the wallet, while the rest of his paycheck went into the bank.

My Dad paid off his house that he built with the help of many friends in 1965 for $7,000 on his 135 acres of wooded land he bought for $2700, while making around $2.50/hr. He could easily sell the house and land for $600,000 now! He has even contemplated subdividing it to sell home lots and make around $1 million after expenses, but honestly cannot see taking the risk of developing it to the gtd payday of selling it outright.

I digress!

Point is...if he had credit cards back then I know he would have spent way more than he should have.

Spending cash, especially cash in an envelope always makes you try to save some just in case you need more at the end of the month!

[JasonEngler]

If have tried this system and it was mostly successful. The best lesson learned from this system is to start using cash, rather then your debit or credit cards. I was also more reluctant to make a purchase when I had to count out the money to the sales clerk. Like the previous poster, I only placed a small amount of money in my wallet each week for discretionary spending... when I was out, I was out. I forbid myself from using the debit or credit cards to charge things.

One thing to remember, Debit cards were created by the bank to make spending more convenient. I am sure I am not the only one that thinks it's much easier to hand over plastic then to drop cash in someone's hand for each purchase.

Good Luck!

Jason

[LuxLiving]

I think mvelopes (add .com) really marries the old envelope system w/today's technology...I however was loathe to spend the money on it. Would work for a variety of people though as would budgetmap (add .com). These are tools that make the spending plan/cash outlay system work cohesively together.

When using envelopes system - DO NOT BORROW from one envelope to another...it defeats the purpose.

[CHUBROCK]

I have used an envelope type system for years. My dad taught me to do the following:

Take all of your montly bills and divide them by 4 if you get paid weekly or divide them by 2 if you get paid bi-weekly. This is the amount of money that you need to put away each week to be able to pay each bill at the end of the month.

I do this using an excel spreadsheet. I feel that it helps me stay focused. I know exactly where my money is going each week and I don't find myself looking for money at the end of the month to pay bills.

This is a simplified version of course. If you are interested in seeing my spreadsheet, send me a PM with your email and I will send you a sample of what I use.

[autoxer]

I use different accounts as my envelopes. I have a high yield savings account which is the envelope for my Roth savings & a my future house downpayment. Checking account #1 gets a direct deposit with enough money to cover the major bills (rent, car payment, utilities). Checking account #2 gets the spending money for the week (food, gas, entertainment). So when I drain that account, I stop spending until the next payday & never have to worry about having enough for the major bills.

[boefixepa]

I never really understood what the word BUDGET really meant until I found mvelopes. I would really encourage you to check it out. It was like a light came on and as it did all the stress and worry vanished! It was great and I would never go back to how I was doing it before! The envelope system works, wether you do it on the computer or cash in envelopes.

GOOD LUCK!

[Mathew Green]

Originally Posted by papabear

Why don't you try using Mvelopes, they provide a 30 day free trial. This is a wonderful way of managing money in the form of envelopes makin it very easy to sort out ones' income into specific categories.

Key words: "30 day free trial". That means after the first 30 days you have to pay them for something that you can do just as well at home for free.

Three good alternatives:

1) Excel spreadsheet (or a traditional paper spreadsheet) with dates down the side, categories across the top, and three columns headed "In", "Out", and "Balance" for each category. With Excel, you can have one line per week and each time you type an updated number in the "In" or "Out" column the "Balance" will update automatically. On a paper worksheet, it works the same way, but you write your figures in pencil untill they become final.

2) Ten or more pieces of notebook paper or 3-column ledger paper with only one cagegory on each piece. Use "In", "Out", and "Balance" as above but use a line for each day that category has activity and no line if there's no activity. If you wanted to, you could use one line for every item you buy but that's a traditional ledger system; not an envelope system. BTW: You could do it this way in Excel too by using a different worksheet for each category and a "Totals" worksheet for the weekly/monthly totals. I use this Excel method myself, but many people prefer paper and everybody has some notebook paper they can draw lines on.

3) Use real envelopes and put real money in them. This is inconvenient now that so many monthly bills are paid by check or electronic transfer, but you can use play money (even homemade play money) to represent the things you'll pay by check. Or you can stick a tally sheet in the envelope for categories you pay with you checking account.

The most important thing with the envelope system is to divide your spending, in fact your whole money flow, into broad categories based on three super-categories:

1) "Essential" (rent, utilities, food...)
2) "Needed-but-Postponable" (clothes, repairs...)
3) "Discretionary" (stuff you want but you can live without it if the money runs out).

Never borrow from one envelope to pay for another unless you absolutely have to. And NEVER EVER borrow from an "Essential" envelope to pay for a "Postponable" or "Discretionary" envelope.

Also remember that money left in an envelope at the end of the month isn't 'free money'. It should either be transfered to your emergency fund or put into an envelope marked "Saving to buy a...." By sticking to your monthly limits and putting money for special purchases in its own envelope you'll avoid the temptation to be real frugal one month and blow it all the next.

[Ima saver]

I have used the envelope system for 41 years, using real money and real envelopes. I never tried anything else but once. i tried keeping track of it on paper, but I like the cash in the envelope better. As most of you know, I know nothing about computers (except how to type on one) and I have never paid a bill late in my life.
I never "borrow" from an envelope except on rare occasion. When i do, I stick and IOU on it and pay it right back the next payday.
I put money in my envelopes in order of importance also because my husband makes different amounts according to the number of hours he works.
For example medical and christmas money come last. If there is no money for those envelopes, that is ok! (I don't get sick very often, been to doctor twice in life)

[Staceyy]

I cannot understand how this could work in today's society as when I look at my bills, all of the companies I deal with are spread out throughout the US. My mortgage company is in one state, credit card companes are spread out throughout the US, as are my investment companies and my utility companies do not accept cash. About the only place I can spend cash is the grocery store. I must be missing something here. How do you pay cash everywhere?

[Mathew Green]

Originally Posted by Staceyy

I cannot understand how this could work in today's society as when I look at my bills, all of the companies I deal with are spread out throughout the US.

That is the chief objection to the envelope system and the reason I personally consider it impractical. In our modern economy based on credit cards, debit cards, internet banks, direct deposit, and electronic payments (ACH) even the traditional paper check is virtually obsolete. Paying with cash is only practical for purchases you make in person -- Everything else is paid with virtual money.

The principle behind the envelope system is still valid, but when you substitute electronic transfers for 80% of your expenses, what you've really got is a traditional spreadsheet budget/spending-plan, not an envelope system. (I went into more detail about this in Post #12 in this thread.)

[LuxLiving]

Staceyy, that is why many people use the Mvelopes software program as it is a virtual model on the old manual concept. You can do envelopes/category type planning on a plain piece of paper and then just move your money around electronically as specified in your plan w/o investing in their program. Their website has lots of good info on it!

mvelopes.com

or try my favorite:

youneedabudget.com

another usable concept is:

budgetmap.com

Remember that some people do still live in small towns and try to do most of their business w/local merchants. For those folks just putting cash in an envelope works better for them. With any 'plan' you'll have to do what works best for YOU and your family. Good luck!

[Staceyy]

Thanks!

[lillyb]

I write checks to pay the 'bills' but put cash in my envelopes for things I do need money for between paydays. Currently I have an envelope for groceries, gas, and spending money. I withdraw cash every payday and fund them. Along with this, if I know we'll be needing some clothing or car maintenance, I'll withdraw cash for these envelopes, as well.

It is much easier to pay with a debit card, and painful to spend cash. I spend less when having to hand over actual money, it hurts more. Thus, I reduce my spending. And nothings more embarrassing than not having enough cash on hand at the grocery line, so I REALLY watch my grocery prices (and no, I've never went over, I watch prices closely). Can't begin to add up how much money we've saved since going to cash on these things. Gas envelope is empty and my tanks getting low, I cut down my driving. Spending envelope empty? No magazine this time. You really watch your spending when you have a set amount you can spend.

[pearlieq]

Originally Posted by Ima saver

(I don't get sick very often, been to doctor twice in life)

Ack! I'm sorry for the completely unsolicited PSA, but I really hope you mean you've only had to go to the doctor twice because you were ill, not that you've really only gone twice in your life!

What about basic health screenings? Vaccinations? Pap exams? Mammograms?

I don't mean to stick my nose in where it doesn't belong, but my mom is a breast cancer survivor and I thank God they were able to find it relatively early. Early detection is key to survival for most diseases.

All you've saved and everything you've worked for won't be worth much if you find out you've got late stage cancer and there isn't much that can be done.

[jmjj215]

Criteria to use when selecting a money management method (IMHO) is that it's

1. Flexible
2. Simple to learn
3. Not time consuming to use

If it doesn't meet all three, chances are you'll throw in the towel in short order.

[boefixepa]

I know there are a few people on here who simply cringe that Mvelopes charges a monthly fee, but it's soooo worth it IMHO. It's made a HUGE difference for me. The mvelope system electronically pulles all transactions, from savings, checking, CC, MM, everywhere! You simply drop the transaction into the 'cyper envelope' and you can split a transaction if needed. It comes with free on-line bill pay, so you can pay all your bills and get e-bill for most major CC, utilities, and mortages. I don't have to write but one check a month! It keeps your net worth statement current and with a little time and getting accustome to it I've never looked back!

They have great customer service, so it you get stuck on something all you have to do it call or IM them and they will step you through it. I know there are alot of 'free' products, or similar self-regulated ones out there. What makes this worth the money is you never have to worry about 'forgetting' to enter a transaction, or lose it because you forgot to back up and you computer got sick! (Been there!!!) Plus if someone uses or makes an unathroized transaction you know within a day, not when the bill shows up in the mail!

I know I am a walking adverstisement, but for me this system was the key for me being able to turn around my financial problems and retrain myself. I just make a 'mvelopes' envelope and stick $10 a month in it....the money's there when needed and sooooo worth it!