So you’ve decided to become more intentional and focused on developing good budgeting habits. Is it because you have a specific goal in mind, like saving up for retirement or buying a house? Perhaps you just want to stop living paycheck to paycheck, build an emergency fund, or start saving for your kids’ college education.
Regardless of why you need to start saving money, there are many ways to reach your goals by controlling your spending, and one of the most popular ways to budget is with the envelope system. This simple budgeting tool has become very popular for its ease of use and old-school sensibility. The phrase “envelope system” was coined by Dave Ramsey, an American businessman, best-selling author, and radio host.
Here’s how it works: You use cash to pay for everything, across a variety of budget categories, including groceries, housing, utilities and entertainment. You keep your allotted amount of cash for these categories in actual envelopes, which allows you to easily track what you are spending in any given category. The bottom line is, once an envelope is empty, you either stop spending or take funds from another category.
To work this budgeting system, you must withdraw a significant amount of cash from each paycheck for the envelopes. For example, if you’ve budgeted $200 per paycheck for food, you must withdraw that amount to put in the corresponding envelope. This system requires you to exercise self-control, meaning if your total comes out to $205 at the grocery store, you would need to put back $5 worth of items and wait until the next paycheck to refill the envelope.
Read on to learn more about the pros and cons of this simple but effective budgeting technique.
Too Vulnerable: Carrying a lot of cash around means you could easily forget it, lose it or have it stolen. Additionally, you’d have no safety net in place the way you would if your debit card got lost or stolen.
Too Inconvenient: While this strict budgeting system works great for certain personality types, the specific categories can be quite a challenge in some situations. Say you find an item you want to buy online that is on sale for a great price. You would have to deposit cash back into your bank account in order to have enough money to purchase the item.
Too Easy to Overdraft: Say you do keep some cash in your bank account in order to pay some bills online. If you’ve withdrawn too much money from your bank account to fill your envelopes, you might trigger and string of overdraft fees when your autopay bills go through.
Mismatched Categories: If you make purchases from more than one category at the store, it can be very time-consuming and inconvenient for you, the cashier, and everyone behind you in line. Does eating out at a restaurant come out of your food envelope or your entertainment envelope? It can get confusing what category to put something in, which makes it easy to shortchange yourself in one area and overspend in another.
Paycheck Amounts Vary: If your paycheck varies from week to week, you’ll have to recalculate how much is in the budget for your various envelopes, changing how much you take out of the ATM every pay period. This can be difficult and frustrating, and one of the main reasons people abandon this style of budgeting.
Outdated: These days, cash is becoming more and more obsolete. Using cash can be very limiting in certain situations across the board, and it also prevents you from taking advantage of credit card rewards. Furthermore, there are a lot of decent budgeting systems out there that can track your debit or credit card spending.
Simplicity: It’s easy to understand how the envelope system works. Furthermore, they’re easy to carry around, whether you keep them in your purse or fold them up and carry them in your pocket. No muscles required.
Free: As long as you have envelopes already, this budgeting technique costs nothing to implement immediately.
Rewarding: Should you have leftover funds in any given envelope, that means you have extra cash to spend elsewhere, whether you need help in other categories or want to treat yourself to something fun like a pizza or a new outfit.
It Forces You to Be Disciplined: To be most effective, you need to create a budget and stick to it. If you lack discipline, you are pretty much guaranteed to fail with the envelope system.
You Are In Control: The ultimate goal of any budgeting system is to be in control of your finances. Whether that means getting out of debt, saving for retirement of simply not having to title loan near me for every unexpected expense or cash emergency, the bottom line is taking control of your financial destiny.