Have you ever found yourself sat in front of your bank balance and saying, “Where the hell did all my money go?!”.
Well, the envelope system intends to prevent that from ever happening again. I’m going to tell you how it works and I’m also going to give you a handy little cash envelope template that you can use to print off your own cash envelopes.
If you’ve never heard of the envelope system it’s a fantastic, yet simple, system to keep you organized and on track with your budget. It forces discipline into your spending and makes you more mindful of your spending habits.
Recently I’ve had good cause to start using the envelope system in my own life.
Over the last three months, I have found myself overspending on my budget. In the last two years, I’ve been pretty incredible in pulling control into my finances, if I do say so myself. But, I’m not infallible.
Two steps back, three steps forward
It all started with the month that I said, “screw it”. I gave myself a brief break from frugality and saving and allowed myself a breather. It was a reward of sorts for all the hard work I had done with my finances that year.
Don’t get me wrong, I still stand by that post. But, that month was followed by two challenging and stressful months making it easy to crave some of life’s tiny luxuries again.
That morning coffee I love so much, the one I’m always telling you made a massive difference to my budget! Well, I needed it.
It’s sad to say but it almost brought some sanity to my challenging world. I would quip to the barista at my local coffee shop that he was like a drug dealer!
And it wasn’t just the coffee. Other habits began to slip. Buying lunch at work. Takeaway food on the way home. Mindlessly grabbing groceries without planning meals. It all began to stack up again. All the little things that add up to having such an impact on your pocket began to erode away mine.
My budget veered off the rails
Mindfulness of my spending veered off the rails. Each week as I checked in on my budget I would have to make readjustments. And, as that happened my financial goals for the year started to slip away.
Before I knew it, I faced the realization my yearly financial goals were unattainable.
My budget spreadsheet gives me a clear view on my spending habits so it is easy for me to see what I’ve been overspending on and helps me understand why.
Such insight is one of the great benefits of keeping and managing a family budget! If you don’t keep a budget I’ll quickly mention you can get a copy of my budget spreadsheet template that I use by signing up to my mailing list. Just fill in the details below:
Despite the fact that I manage my budget weekly I found myself overspending. Over the last two years, I managed to form some incredibly good habits in respect of my finances. Yet, these habits have slipped recently and I’ve worked out why.
I believe what I’ve learned about why this has happened can help anyone. But that’s not the topic I want to cover here. I promise I’ll write about it very soon!
A small part of the solution to the problem I face related to the availability of your flexible friend, the debit and credit card.
You see, I’ve found part of my problem is that I’ve been using my debit card for small spending.
Let’s face it, paying for things with a debit card is easy. Sometimes too easy!
In New Zealand, we have PayWave which allows you to hover or tap your card over the terminal and you’re done. For purchases under $80, there’s no pin required. Paying for stuff is fast and easy. Like I said, too easy. It doesn’t give you enough time to stop and think, “Can I afford this?”.
And it’s these small purchases that have been stacking up and biting me in the ass!
You don’t see your balance reducing when you make a purchase on a card. And, unless you checking in on your bank balance and budget on a daily basis, or you’re incredibly disciplined with your spending, you may find yourself sitting down one day saying to yourself, “Where the hell did all my money go!”.
We’ve all been there, right?
Well, like I said the envelope system sorts that out! You see, the envelope system exists to help you with budgeting.
So, what is the envelope system?
The envelope system is also commonly referred to as the cash envelope system. To state the obvious the cash envelope system is putting cash in an envelope to use for spending.
If you start the envelope system to keep your own spending in check there’s a first, golden rule that you’re going to follow.
The envelope system requires that you put your credit and debit card away. From now on you’re going to pay CASH.
But who pays cash nowadays, you ask!
Well, if you’re overspending on stuff, or you just want to see if you can put more rigor around your budgeting and spending, my answer is, “YOU DO!”.
Trust me, try it!
Using the envelope system is going to open your eyes and keep you from overspending on your budget.
The envelope system explained
To get started you need to divide your spending into categories. My biggest recommendation is that you do this based on a budget. It’s going to help you massively to have a solid budget in place. If you aren’t keeping a budget you should check out these posts:
- What is a budget plan
- How to make a budget planner
- How a simple family budget paid off $5,000 of debt in 6 weeks
Once you have some budget categories set up each category will have it’s own envelope to keep things organized.
Now don’t run off to the shops to buy some envelopes. I have created a cash envelope template for you to print out. Some paper and some glue or sticky tape and you can fold your own!
It’s even better when you create these on colored paper. Simply pop your email in the box below and I’ll send the cash envelope PDF template to your inbox:
Each envelope clearly labels the category on the front. Stuck for category ideas? Here are some simple examples:
- Electric Bill
All spending is done with cash
In the norm, the envelope system directs that all spending will be with cash.
Personally, I’m going to suggest a better alternative to that a little later. For now, let’s just walk through how it normally works, shall we?
It doesn’t matter how you budget, you could budget monthly, fortnightly or weekly. What’s important is that you have a budget amount for each category. You’re going to withdraw the cash for your entire budget period, for example, the entire fortnight, and divide it up into each cash envelope for that category.
If you have designated $100 for groceries, $100 goes in the groceries envelope. If you have $50 for your phone, $50 goes in the phone envelope, and so on.
I strongly recommend you keep a weekly budget. I love weekly budgets. I think they are much more powerful, far simpler to manage and easier to keep too.
From here, you are going to do all your spending from these envelopes. The idea is that once you’ve spent the cash and there’s nothing left in that particular envelope you’re done. You have no other options for spending in that category until the following week.
Seeing the cash diminish with each spend is going to force you to master the art of self-discipline.
That means you’re going to leave your credit or debit card at home, all the time! It’s too easy to use that as a safety net.
If you’re at the checkout paying for groceries and you’re $1 short, you have to put something back. You need to stick to what the envelope contains.
Don’t dip into the other envelopes. Stick with it!
It’s an inconvenience. Sometimes it’s awkward and embarrassing. Other times it’s outright painful. But it’s this pain that helps you change your behavior. Allow yourself to experience the pain if it happens.
When this happens you start to become more conscious of your overspending. You’ll start making the small, but impacting decisions about your finances. As you do this more and more you’ll start to form unconscious habits and it becomes easier.
It’s likely you’ll run out of cash quickly when you start the envelope system. But stick with it. If you follow a weekly budget you’ll probably only have a few days to last before you replenish your envelopes. That’s one of the biggest benefits to splitting your income into weekly chunks. Just avoid the temptation to use any cards, even if you are desperate. The stronger you are now, the faster you’re going to achieve the financial goals.
What you’re not going to pay in cash
Here’s where I recommend deviating from the norm if you can.
There is huge potential in following the envelope system how it was intended. But, there are often some expenses you are more likely to pay for using a debit card.
Note: I said debit card because you shouldn’t be using a credit card unless you’re using my counter-intuitive method to paying off a credit card.
You ultimately need to decide what you’re going to pay for in cash and what with a debit card.
For example, every Sunday I fill up my car with gas with the amount defined in my budget. I go straight to the gas station, fill it up with $25. On the way, I stop by the bus station and top up my bus card with the $30 I need to travel to work each day. I then take my cash out for my groceries envelope and come home. The rest of the week, my card stays at home.
But paying bills with cash can be a pain in the backside. You may opt to pay bills online and you may have these set up to take the amount from your card when they are due.
But there’s a better way to pay bills, in my opinion.
Automate your bill payments
Rather than paying online with a debit card you should automate. When I say automate I mean that some utility providers will allow you to pay the same amount on a regular basis.
For example, I pay $48 a fortnight for my electricity. In summer my account ends up in the positive. In winter, it goes the other way. But it makes my outgoings predictable and my budget easier to predict.
I automate this with a direct debit payment from my account. I set and forget!
Automating is best for fixed expenses. Things like rent, insurance, and subscriptions.
If you can manage variable expenses into a fixed payment, as I did with my electricity bill, then do it. Predictability helps you focus on the important things. Or, should I say, it prevents you being blindsided one month because you used more electricity for some reason.
Cash purchases, the things you aren’t going to automate, are anything you walk into a store and buy. So things like groceries is a prime example.
This reduces the number of envelopes you’ll need in your cash envelope system and the amount of cash you keep on you.
See the difference
Using the envelope system, you’ll see in a matter of weeks how quickly your spending habits change. It helps you pay attention to where you’re spending your money.
As the money in your envelope dries up situations force you to think about what you are buying and why.
You’ll start to make those decisions before you get to the checkout.
Eventually, it’ll become second nature.
You’ll begin to intuitively know what you can afford and what the alternatives are.
For example, I budget 100 a week for food. On occasion, I’ve been three-quarters of the way through my week and found myself pining for a coffee from a decent coffee shop, but I only have $10 left. I’m more likely to consider waiting until I get to work and having a coffee there.
It’s crappy coffee at work. The coffee shop coffee tastes like nectar from the Gods by comparison!
But, you see, these are the small but sensible decisions you will start to make. You probably don’t think anything of such a purchase when you have your debit or credit card on you. And these little expenditures can really mount up!
The envelope system for couples
So what happens if you’re in a relationship? How does the envelope system work then?
The best advice I can give for couples is to ensure that you’re on the same page with your finances and plan out your weeks.
You can either share a budget or share a mutual fund for certain living costs. For expenses like groceries, it really pays to plan your meals for the week. This can save you money regardless of whether you’re in a relationship or not but doing so keeps you both on track.
Communication is the key!
You may want to split the money between you. In this case, it’s important you keep each other accountable to spending and motivated to stay on track.
If you share the budget, create envelopes for each of you and split out the money as you have agreed.
If either of you admits to worse spending habits than then other then chances are one of you will overspend much to the dismay of the other. Try to avoid blame if this happens and focus on keeping each other motivated.
Treating it as a game or a competition can often help make it more fun. Perhaps work in a challenge, if one of you overspends on your portion of the envelope you owe the other a 30-minute massage or breakfast in bed.
The alternative is you could agree that one of you is responsible for picking up extra groceries during the week. There could be any number of reasons why. One of you may be less likely to overspend. One may work closer to the grocery store, saving you travel costs.
Save money, start a money challenge
If you feel like taking saving your cash envelope system to another level. Try taking the savings you make each week and putting them toward a money challenge. Money challenges are a fantastic way of having fun whilst building up a pocket of cash. These are ideally suited to building up an emergency fund. I have two posts on this blog that incorporate money challenges that will help you save over $1,000 over the course of a year.
So how do you incorporate money challenges into your cash envelope system savings?
Well, if you start to get good with your cash envelope system you may find you have the odd dollar or more available each month. These money challenges can see you putting away anything from $1 one week to $52 the next. If you download my printable cheat sheets in either of the money challenge posts you can cross of the savings you make each week and attempt to complete the challenge. You’ll have double the motivation to make savings on your spending!
Give the cash envelope system a try
The cash envelope system is a really effective way of keeping yourself contained in the boundaries of your budget. If you have trouble staying on track with your spending the envelope system is most definitely for you. Ditch your debit card, automate as many of your bills as you can and focus on the money you have in your envelopes. Soon enough you will form habits and those bad spending habits that have been crippling your financial goals will start to melt away.
Don’t forget to enter your email address in the opt-in box in the article to receive your printable cash envelope template. It’s totally free!
And do let me know in the comments if you’ve ever used the envelope system and how it worked out for you!