What is the Envelope System?
As per my introduction in my previous article (My experience in offshore investing), coming from Zimbabwe meant that times where tough and we had to think of many creative ways to budget and save money. The one system that has always worked for me is the ‘envelope system. It was a hard sell at first to my wife, but after she saw the benefits to this system it became a monthly part of our lives.
The envelope system is a way to track exactly how much money you have in each budget category for the month, by keeping your cash tucked away in envelopes. The only downside is that you need to keep your envelopes in a safe place, so that no one can have access to your money.
How the Envelope System Works
One of the reasons we overspend is because it’s way too easy just to swipe that card. I know most of us pop into the shop for bread and milk and end up adding a cold drink and the midnight chocolate to our shopping baskets, as an example.
This is where the envelope system comes in. It is one more tool that helps you stick to your budget – here’s how it works:
Think of the different items in your budget that need cash flow.
It’s a good idea to use the envelope system for items that you tend to overspend on. Think of things like groceries, eating out, entertainment, petrol/travel and clothing.
You get to decide which budget categories get an envelope, but here are a few to consider:
- Day to day living
You’ll see that I excluded big items like rent, or of you’re paying off a car, as most of those are done through debit orders anyway.
Create an envelope for every cash item you have in your budget.
We do monthly shopping where we go to a store and stock up on all the basic things we might need for that month, then we place the leftover cash in our weekly grocery envelope. Each time we need to buy something in the week, we only use the cash from that envelope.
No money and I mean NO money should come out of that groceries envelope, except to pay for food at the grocery store. If you go shopping and leave the envelope at home, well then you need to turn your car around.
The same goes for all the other items that you have an envelope for: only use the cash in them for what it is marked for.
I know that some months are harder than others, but if you’re disciplined and really want to stop overspending, then the envelope system could work for you.
The advantages of using this system are:
- Keeping you on track with your budget
- You learn financial discipline
- It feels more difficult to overspend
The best part is when you have extra cash left over.
What we do is take that extra money and put it in a new envelope for a rainy day.
This envelope should be put far away from the others, so that you don’t get tempted to use it.
Remember, the whole purpose of the envelope system is to control your spending and help you stick to your budget.
I hope that this might help you during these testing times.
Till next time,