Friday, June 25, 2010

My Two Cents On Budgeting: The Envelope System

In our family, we've chosen to use debit cards and cash as our preferred methods of payment.

In the history of our marriage, we haven't used credit cards at all. Although I can see where a credit card could come in handy and I know that many people use them responsibly, our credit-card free approach has worked well for us.

As a single lady, I did have a credit card. Even though I was not a wild impulse spender, I spent an average of $100 more a month when charging purchases than when I paid with cash or writing a check. Those quick little trips add up!

I believe the reason for this was that I wasn't actually parting with money when using a credit card. Small purchases didn't seem like a big deal. After all, I could always pay the balance off when the bill came every month.

Before we were married, we were introduced to Dave Ramsey. His money managing tips were old-fashioned, simple common sense and easy to implement.

Don't spend more than you make.  

Pay cash.  

Avoid debt. 

We decided then to ditch the credit cards and live without them, committing to buy only what we had the money in hand for. 

One method Dave highly recommends is the envelope system. I had heard about this from other financial gurus as well, so it wasn't a totally new concept for me. I hadn't implemented it before marriage, but it seemed like it would be a good fit for us.

What is the envelope system?

Designate one envelope for each spending category. Put the agreed upon amount of cash in each envelope.

When spending throughout the month or week or however your budget is set up, you use the money from the designated envelope. When the money is gone, it's gone.

My husband and I really like this method for four reasons:

1. Paying with cash forces us to think through our purchases instead of just throwing stuff into the shopping cart or making impulse online purchases.

2. We spend less when paying with cash than when using the debit card.

3. Since we have joint accounts, paying cash is easier to keep up with than both of us using the debit cards independently and possibly overdrafting.

4. The envelope system keeps us organized. We can tell at a glance exactly how much money we have for the rest of the pay period.

We use the cash envelope system for cash purchases. We pay our rent, phone bill, utilities, etc. by check or automatic bank draft, whichever is applicable.

Currently we use cash envelopes for:

--Dog food
--Play money (Fun money for both of us.)
--Eating out/ entertainment
--Thrifting/ yard sales

It's often helpful to have a category with "blow money" as extra if you need it. Also, clothing and gift money can be included in the envelopes as well.  Look at your budget/ spending plan and designate envelope categories to how it fits into your life and where you spend your money.

We used to put clothing and Christmas money aside each month in our envelopes but found it was too easy to spend that money for something else if it came up. Therefore, when it came time to buy clothing and Christmas gifts, the money wasn't there. So we started putting those categories in savings  instead and it has worked great! The money is there when we need it. Out of sight, out of mind. :-)

I'm boring so I just use Plain Jane envelopes in a plastic coupon organizer. Someday, I'd love to make or buy a cuter system. But for now this works.

Using envelopes does not embarrass me in the least. But then I guess I'm used to being weird. I don't know! I've found that my cash envelopes are often a conversation starter. "Do you do Dave Ramsey?" "How does this work for you?" "What categories do you use the envelopes for?"

Come to think of it, it's as much of a conversation starter as when I use my coupon binder in the grocery store.  I'll share about all the Coupon 101 classes that take place in the pasta aisle another time!

I understand that this way of budgeting may not be an ideal fit for every family but it has certainly been very beneficial for us.

Let's talk! Do you use the envelope system? If so, what does and does not work for you? What categories do you have for your envelopes?

**Coming up next week: I'll be sharing a little about paying down debt. Hope you can join us!

**This post is a part of Frugal Fridays! Be sure to hop on over and read Jessica's great post on How To Live Without Credit Cards!


The Working Home Keeper said...

We currently do cash envelopes for Christmas, groceries, clothing, eating out and allowances (blow money). We have also found that we spend less when using cash.

Mary Ellen

Nikki said...

We do the envelope system for groceries. I don't think it works well for gas. We also use it for x-mas expenses, etc. I've found that I spend less when I use cash for groceries. Thanks for sharing.

Rhonda said...

Good post Mary Ann.

we use cash for groceries, gift money, our personal allowances and fun money.
But I pay all our bills online with the free billpay our credit union offers. and we do put gas and some purchases on a credit card that we pay off every month.

I think the main thing is plan your spending before you start spending, like Dave says.

Lyn said...

We're big fans of the envelope method too. It has really helped us to know where our money is going because there is not a lot of room for error with our budget. We have about 12 different envelopes for the home and I have 5 additional that I use. I'll probably be adding a few more categories soon like Christmas and other saving envelopes.

Denise said...

We have not used the envelope system but I have started using cash (rather the even my debit) to pay for things and it sure helps to curb the excess spending. I know there have been times that I have gone to the store and paid with my debit card while chatting and don't even know how much I spent! Baby steps I tell myself.

Bevy said...


There is nothing like whipping out the ole Chicago-roll...schumpt,schumpt, schumpt... and watching the clerks mouth hit the floor.

Do you know what a Chicago roll is??? See Scott (my hubby) for details. ;)

Debbie Fisher (debbiedee) said...

We have been using the envelopes for so many years now I can't remember how long it's been. I do know it was before we had even heard of Dave Ramsey. The guy we heard it from was Ron Blue.

Our envelopes are for:
food, misc (shampoo, toilet paper etc), fuel, entertainment (eating out, clothing (we each have our own which includes our two boys), fun money and gifts.

The boys have these categories...tithe (which comes first), clothing, entertainment, gifts. They are now 15 and almost 18 and have been doing this for about 5 years. My oldest is going off to college and I hope he takes what he has learned with him.

I see Nikki says it doesn't work well for gas for her, but it does for us. It makes us think about do we really need to go there. Can't we wait and make one trip and combine errands. We also live 30 miles from town, so have been doing this for awhile any way.

Lyn said...

I can see where some people don't put gas money in envelopes. It is not always convenient I find, but if one is on a tight or finite budget as we are, every dollar counts.

It's not so pleasant to be pumping gas in the freezing winter and having to go into the gas station to pay, but it keeps us on track. For us, if we used debit for that I doubt that we would stay within our budget. When we know the gas budget is low, we arrange our life accordingly, kind of like Debbie just mentioned.