The Envelope System Really Works to Keep Your Family On Budget
Most families try to stick to a budget but find that even the best of intentions slip away when faced with temptation or the ease of eating out after a busy day. It's tough. However, some parents have found a way they swear by to keep on track without any programs, apps, or even a pen. The Envelope System was first made popular by Dave Ramsey. Many families who have started using it, or some variation, swear that it helps keep their budget on-track month after month and helps keep them from racking up debt for things they don't really need.
What is it? Basically, the Envelope System is a way to make sure your discretionary spending stays under control. Here is how it works:
- First, figure out your fixed expenses and discretionary income. Your fixed expenses include things like rent or mortgage, health insurance, utility bills, car payments, etc. Whatever is left over is your discretionary income for the month. For many people, this is where they tend to spend more than they have, by going out to eat too often or spending too much on clothing. For many, these seemingly small expenditures can add up to big debt over time.
- Second, divide your discretionary spending into categories. These will vary by family but can include things like eating out, clothing, entertainment, make-up, toys, gas (other than to get to work), babysitters, etc. Some families also include a category for an “allowance” that can be spent on anything or saved from month-to-month to save up for an expensive birthday dinner or pricey Broadway-quality show.
- Third, decide how much money will go into each budget category. For example, you may allot $100 each month to eating out, $50 for a babysitter, $100 for entertainment, etc.
- Fourth, label an envelope for each category. Some families prefer a separate envelope for each category while others prefer to use an accordion envelope with multiple sections so there is only one thing to keep track of.
- Fifth, go the ATM and take out the amount of cash in your discretionary budget. Take the cash and divide it between the categories according to your budget.
- Sixth, commit to only spending the cash in each envelope for that category for the month. Once the cash for each category is gone for the month, that's it – no more eating out or buying new shoes until you refill your envelope the next month.
If you are not sure where to start, try looking at a few months worth of credit card statements to see how much you typically spend on each category or track your spending for a month or two to see where your money is going. Once you start, allow yourself some flexibility. You may find it easier to cut back on spending on clothing but not as easy to cut back on dinner out. Give yourself the ability to make some adjustments while you figure things out as long as you do not go over the total amount in your budget. The “allowance” envelope is an important part of the system for many families to account for a last-minute invitation you hadn't planned on needing to buy a gift for or to provide some extra funds for splurges while staying on-budget.
Have you tried the envelope system? How did it work for you?