How I Use the Envelope System

How I Use the Envelope System

Budgeting with the Envelope System

I first heard about the envelope system during graduate school. I was searching for better ways to manage our finances.  We had just moved several states from home, and I was working as a graduate assistant.  And my fiancé was working retail.  We were broke.  I was researching different budgeting strategies and came across the envelope system.

With this system, you create an envelope for each expense or spending category in your budget.  Rent, utilities, cell phone, internet, and groceries each have their own envelope.  Then you withdraw your monthly spending in cash. Next you divide it between each envelope, and use the money to pay for each associated expense.  

Envelope System

While this seemed like an interesting, and rather precise, system I knew it wouldn’t work for us.  We never use cash.  When it comes to budgeting, even back in graduate school, I knew one thing to be true—don’t over complicate the issue.  Eventually, we tracked our spending in Excel and managed our budget from there.  This gave us the freedom we needed, but also the structure.  And I didn’t really think about the envelope system again for years.

Using the System to Save Money

A few years ago, my brother and his wife and my husband and I decided to throw my parents a surprise 50th anniversary party.  My brother and I decided we would split the bill for the party 50/50.  Their anniversary was early summer, so I had several months to save, which was good.  My husband and I were still getting our feet under us career wise and weren’t making a ton of money.  

That night, when we got home, I asked my husband how we wanted to save the party money.  Usually for saving money we start a high yield savings account.  But that seemed to be a better fit for our more long-term goals.  I went to bed that night thinking of how we could save. And somewhere in the back of my mind, the envelope system popped back up.

Creating a Savings Envelope

I realized that I could use the envelope system to save for some of our short-term goals.  First, I got a blank envelope and labeled it with our goal “Parents 50th Anniversary Party”.  Next we came up with how much we thought we’d need to cover our half of the party.  Then we divided this number by the number of paychecks we would receive before the party took place.  This helped us determine the amount of cash to take out of the bank after each paycheck. 

After we got paid, I would go to the bank and take out our predetermined amount.  When I got home, I would write the date and the new total in the envelope on the outside.  This allowed me to keep track of our progress and kept us on track.

Envelope System for Saving

When it was time to shop for the party supplies, I took my envelope with me and paid cash.  This kept my spending in check, but it also allowed me to spend more than I would have without the savings.  And for me this highlighted the practicality of using the envelope system like this.

Creating a New Habit

Currently, we have several long-term and short-term savings goals we are working towards.  Two of these short-term goals have envelopes.  The timeframe for each is short enough that we don’t need to start a separate savings account, but having the envelope allows us to know we have money set aside.  

Saving this way has also helped me create a new habit.  If I find myself with cash randomly, I don’t spend it.  I take it home and assign it to an envelope.  This unexpected money helps me reach my goal faster and since I didn’t plan on having it in the first place, I don’t miss it.

Why This System Works

Before trying the saving envelope system, I often would leave the cash in my wallet but tell myself I was saving it for a specific purpose.  But, because it wasn’t labeled and was with me when I was out and about, I often spent the money on other things.  The temptation was there, and I couldn’t resist.

By taking the money out of my wallet, putting it in a labeled envelope, and putting that envelope in a safe place, I created separation.  If I had an unexpected expense pop up, the money wasn’t with me.  It was also labeled so if I thought about spending it on something else, I could see exactly what spending the money today was costing me in the future.  I think this is the beauty of this system.

Creating an envelope for a short-term savings goal allows you to clearly define WHY you are saving, which is important.  It also helps you get specific.  If you know how much money you need in six months, you can determine a monthly goal.  Put this much cash in the envelope each month to reach your goal.  And using an envelope, especially if you are keeping track of the total saved on the outside lets you track your progress.  This can help keep you on target and can help you reach your goal.

Final Thoughts

The biggest downside to using the envelope system for saving money is that you won’t earn any interest. However, if it’s a short-term goal, and it would be saved in a regular savings account, you probably aren’t leaving too much money on the table.  Saving for short-term goals in an out of sight, out of mind way, gives the money a chance to accumulate so it is there when you need it.  If you have a small savings goal you are trying to reach, creating an envelope for it might be worth a try!

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