The Envelope System: How to Make Your Cash Visible Again

We’ve discussed numerous avenues an individual could take in order to establish and maintain a working household budget. Someone could do it via paper ledger, computer spreadsheet or software program. They can break their categories down by generalizations or get into the minutiae do describe even the most minor of expenses. They even have the option of budgeting on a daily, weekly or a monthly basis. There’s also the envelope system. But we’ll get to that in a minute.

At the end of whatever process is done, what an individual has is simply numerical values connected to various categories. What they don’t have is the actual money to be spent. Sure, today’s economy is all about virtual spending — money removed from a credit or debit card instead of actual transfer of cash and coin from the purchaser to the vendor. Does it make purchasing items easier? Absolutely! However, it also makes it easier to overspend.

Even if an individual has cut up all their credit cards, a debit card is still a crutch than can be used to damage a budget. You can use it for purchases large and small. And if there’s a location that doesn’t take a card, an ATM is usually nearby to withdraw the cash. The constant use of this card does two things. First, it creates a mound of paperwork to record in the form of receipts. Second, it adds costs in the form of ATM withdrawal fees. For a weekly or monthly recorder this can lead to a budget out of sync with the balance in an individuals bank account. Even a daily budgeter can get into trouble if a receipt is missed or automated deduction taken.

There is a solution to it, and it’s one that has been touted by other sage financial advisors, including some of your relatives. It’s called the Envelope System. Here’s how it works:

1. Head to the bank or ATM machine once the budget is prepared, and take out all of the cash needed to cover expenses until the next pay period. This includes money for groceries, fuel, household items, clothing or general spending.

2. Put all of the money in individual envelopes labeled according to category.

3. Use only the money in those envelopes for purchases.

4. Do not withdraw additional cash should the envelope money run out.

This does a few things for the budgeter. The most important is that they’re able to see the physical money that’s available for use. Viewing the available money sets a mental limit for them on what they can and can’t do, so they’re more careful on what they purchase. This careful spending gets set into their psyche, changing the way they spend during the next pay period. The end result is more money saved and put toward paying off debt.

Not convinced? Try it just once and let us know the results.


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