Envelope Budgeting System: What You Need to Know
Although it has been in existence for quite some time, the envelope system of budgeting became highly popularized by TV/radio personality Dave Ramsey over the past decade as he sought to help individuals and couples escape from debt and build a better lifestyle.
In this article, we are going to look at how an envelope budget works, what it may look like in practice, and how you can use this system to get your spending in line, reduce debt, and get on the path to financial independence!
What Is the Envelope System?
For many people, myself included, keeping track of receipts on a monthly basis and entering spending data into an excel spreadsheet to keep track of a budget seems completely morbid. In fact, it sounds so horrible to most people that they know they won’t have success with a traditional budgeting system.
Still, these individuals usually know that they have a debt problem, and they need to find smart, practical ways for how they can better manage their money. The envelope system is a method that serves to fill the gap in this regard, helping individuals to allocate their money according to what they can spend on a discretionary basis without having to uphold a full budget.
How the Envelope Budget Works
Using this system, every time that an individual receives a paycheck they will immediately pay their bills (i.e. mortgage, electricity, etc.) and then throw as much money as possible at their outstanding debt (i.e. auto loans, credit cards, student loans).
With the remaining money, an individual is allowed to allocate these funds into discretionary spending “envelopes”. These discretionary spending categories could be things like “gas, groceries, eating out, fun, etc.”
That person is only allowed to use the money in each envelope for each specific item each pay period. In this way, it serves to develop a budgeting-style discipline without actually having to budget.
What The Envelope System Looks Like Practically
This past month, I put $100 into my “clothing envelope” and I accidentally spent $100 on clothes at local retailers by the 25th of March. As a result, I wasn’t able to buy any more clothing through the end of the month (since my pay period is monthly). Once the 1st of April came around, I re-loaded my clothing envelope for April and started over again.
Of course, this system isn’t entirely rigid. If you find that you simply don’t have enough money in an important envelope (like groceries) to make it through the end of the month, then it is okay to temporarily steal from another envelope now and to put more money into the groceries envelope the next month.
However, as a matter of practice, you are discouraged from stealing from envelopes that are not dedicated to your current purpose as much as possible because this breaks the cycle of discipline that this system seeks to foster.
With that said, what happens if you have money left over in your envelopes at the end of the month? That money is yours to do with as you please. Pay off debt, roll it over to the next month, treat yourself to a dinner out, whatever you want. That being said, if you are consistently going under or over in an envelope, you might want to consider adjusting the amount you budget.