Debt Free Destiny

The tried-and-true cash-based envelope system has evolved into something very powerful, helpful, and easy to use!

In a nutshell, the envelope system is a way of budgeting your money where you set aside budgeted amounts for each category into envelopes. When a need arises to spend money, you use the money out of the appropriate envelope.

It’s truly the best way to help you control your spending. And controlling your spending is essential to financial success.

The Envelope System - A Short History

Back in the day, before plastic dominated peoples wallets, cash was the main payment method. Given the lack of confidence in banks, most people saved their money at home and the envelope system arose as a natural way to budget.

Today, with the popularity and convenience of debit and credit cards, checking and savings accounts, wasting money on “impulse buys” and blowing your budget has become easier than ever, hence the return of the envelope system.

Benefits of Using Cash in the Envelope Budget

The main benefit of the envelope system is that it causes you to think twice before committing to a purchase. For some people, there’s something psychological about laying out cash for a purchase instead of using plastic. It “hurts” more to watch real money going away.

The heart of the envelope system is this:
It breaks bad spending habits, reduces impulse buying and enforces your budget.

Using the envelope system reduces wasteful spending.

Remember the ATM example? You take out $40 and 2 days later you only have $6 left? We all do it, and we can barely remember where we spent it. Where did it go? Well, when you use the envelope system, you take money out of a envelope for a specific purpose, which make you conscious of where it is to be spent.

The envelope system also enforces your budget. It forces you to budget down to the last dollar and when the money is gone from an envelope - there’s no more to spend. How many times have you used up your budget category, but bought another item anyway because you knew you could “borrow from another category”? Using envelopes and cash, “borrowing” is much more difficult. And if it happens too often, you need to re-evaluate your amounts or your behavior.

How it Works - Step By Step

1. First, divide up your paycheck according to your categorized budget amounts and fill each envelope with the proper amount of cash. For example, if you’ve budgeted $600 for groceries, then put $600 in the groceries envelope. Since most people get paid every two weeks or twice a month, put $300 in each time you get paid.
2. Make your purchases and pay your bills from the envelopes. Since some bills are paid automatically or are taken out of your bank electronically, it makes paying with cash impossible. In this case, simply write the budgeted amount on the envelope and when the bill gets paid, subtract the payment from the number on the envelope. This can be easily done with categories like mortgage, insurance, and utilities.
3. Populate the envelopes each time you get paid and pay the bills as they come in. To make things easier, you can also base your budget on pay periods. If you don’t have enough in the appropriate envelope for a particular bill, wait until you get paid to re-populate the envelope and pay the bill. If this causes you to be late paying it, adjust your budget so that you can pay it on time.

Modern Twist

Today, there are many products out there to help you maintain your budget. Quicken and Microsoft Money allow you to track spending and set up budgets, but there is also software that puts a powerful modern twist on the envelope system.

Software-based envelope systems like Mvelopes Personal have the following benefits (most not found in Quicken or Money):

• separate spending registers (like a checkbook) for each category
• automatically allocated your income to each category - the software calculates how much is needed to pay off-pay period bills (ex. garbage collection paid every 2 months)
• Bill pay and real-time transaction downloads
• Tracks spending against income by updating spending account balances as purchases are made
• Your accounts are accessible online and from any PDA 24/7. This allows you to make an informed spending decision at any point.