The envelope budgeting system was popularized by financial commentator Dave Ramsey, though it has been a staple of budgeting for a very long time.
This very simple system makes your budget a very important, physical property of your life.
Fun fact: This system seems to have its roots in the Great Depression, when many people believed their mattress (and envelopes!) were far safer than the banking system.
How the Envelope Budgeting System Works
If you love mail, you’ll love this system.
An envelope budgeting system works by creating separate envelopes for each of your main budget categories. On each envelope you apply a label – or just scribble with pen, our favorite! – the goods, services, or products you can buy with the money in that envelope.
Some key envelope budgeting system categories might include:
- Groceries
- Gas
- Clothing
- Entertainment
The idea here is that your budget takes a three-dimensional form. No longer is it just a plan on paper, and no more are the budget categories just words. Nope, each budget category is its own envelope.
At the beginning of the month (or whenever you get paid) you put each portion of cash into its proper envelope. When the money runs out – you’re done! No more spending on that category. So, if you budget for $100 of meals out of the home each month, it’s $100 and done. If there’s no more money left in the envelope, you can’t spend any more. Done!
Why it Works
The envelope system is great because it’s so constrictive.
First, you have to actually plan your spending beforehand – you have to physically carry the envelope with you for whatever it is you want to buy. Want to go to the grocery store? Bring the grocery envelope!
Secondly – and this is very important for Dave Ramsey – you never use debit or credit cards. The envelope system says no to plastic. Are debit and credit cards bad? Not necessarily – but they make hard to track all of our spending. It’s fairly simple to see that a certain envelope is empty. It’s not necessarily so easily to see that a certain column in a paper budget is out of funds.
Finally, you can see every little bit of income and out-go. Every time you add money to the envelope, it starts looking a lot richer. Once the envelope begins to drain, you know you really have to slow your spending.
Who Should Use this Budgeting System?
Anyone can benefit from any kind of budget. But the envelope system is most beneficial to those just getting started in personal finance. It’s also particularly good for those who find it hard to stick to any budget. Doubt yourself; if you’re the kind of person who can lose sight of goals, then use this system. Seriously – you can’t mess it up, nor is it easy to cheat it!
The envelope budgeting system is by-far the hardest system to cheat. Using cash and sorting your budget into real, visible and tangible envelopes has a psychological effect unmatched by other systems.
Envelope budgeting doesn’t require software or accounting. You pay for everything with cash out of the envelope, and put your change back into it. You won’t need to keep track of receipts, nor do you need to balance spending with your planned budget. If you spent money, you know it.
Dave Ramsey advocates this system because it promotes behavioral change. For many people, handing over cash is way harder than swiping a debit or credit card. This difference is, according to Ramsey, the reason it works so well and has such a high success rate.
