The Envelope System – How I Do It

Now that you’ve seen how I write out my budget, this is how I divide my monthly expenses into envelopes.  I use business letter sized envelopes with the pull-tab sticky seals.  There is no best kind of envelope – they were just the cheapest ones I could get at the dollar store.  You can see they had some water damage and are blue on the edges.  This whole system should not cost you. Once you have your envelopes, the first one you should create is your emergency fund.  Assuming you’re in debt, or you have little to no money in your savings, this is THE most important envelope.

You must not start filling any other envelopes until you fill your emergency fund of $1,000.

Don’t freak out.  $1,000 is a lot of money and you might be like, “There’s no way I’ll be able to save $1,000 when I can’t even afford basic expenses.”  The truth is, you have to.  This is your security blanket money.  This is the money that makes it okay for you to take a scissor to your credit cards.  The biggest excuse for not doing a budget and starting to pay off your debt is, “I need my credit cards.  I rely on them for small purchases when I don’t have anything on me.”  The $1,000 emergency fund is both a physical and psychological security blanket.  You’ll feel more confident knowing you have it, and if you have a real emergency and no credit card… you’re still okay.  This is part of the leap of faith that you take when you go credit card-free.  It always pays off.  Later on, when you have a budget in place and your cash flow has been redirected to provide you with an income (however small), you will add to this emergency fund.  But not right now.

An emergency fund might take awhile.  For me it took about 6-7 months to build up.  I used the excess money I found from doing my budget and sticking to it to put $200 / month into the emergency fund envelope.  If you don’t have this money, you need to do something to get it.  Get a second job, do some side jobs, shovel snow, dog sit, whatever.  For me, I just increased the number of students I taught at my private music studio.  Sure, it sucked to teach extra lessons a day knowing I wouldn’t be able to use the extra money to pay bills or have fun, but I had had enough of living paycheck to paycheck.

That’s one of the key parts of making the system work:  You must be hungry for it.

You have to remind yourself every day WHY you’re doing it, or it’s way too easy to quit.  One of my motivations was to repay my parents all the money they lent me when I moved upstate to go back to school.  I had already paid my sister back some that she lent me, and I’m one of those people that keeps a scoresheet of what I owe people (if you buy me dinner you can bet that I will return the favor someday or it will eat away at me).  It doesn’t work the other way around – I never expect people to pay me back.  I want to live a giving lifestyle, and that is another major motivator for me to become financially solvent. Every month I put the extra $200 in this envelope, and in 5 months I had my $1,000.  Not as painful as I thought it would be.

Since the whole reason I was back at school was to get an MBA, I needed to save up money to re-take the GMAT before I could matriculate.  Because my whole plan hinged on not just passing but acing the GMAT, I made an envelope called GMAT and filled that one next – $300.  I took both of those envelopes, sealed them, put them in a shoebox, took out a stepladder, and put them in the highest, most hidden corner of my closet.  Then I forgot about them completely.  If you’re not comfortable having so much cash on hand – if you feel like you’ll dig out the money and spend it, or if you are afraid of roommates stealing it because you live in a dorm or shared apartment – then go to your local credit union and open a new, separate account.  Don’t get a debit card or check book associated with the account.  Leave it there.

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Label the envelopes with your expense categories, and write the amount needed per month in the corner.

Once you have your emergency fund filled up and any other emergency funds you need to fill before you start putting your budget into action, you are ready to make the rest of your envelopes.  Take all of your categories that you identified in your budget, and make an envelope for them.  Remember, you are accounting for EVERY dollar.  If you cannot live without eating out, make an eating out envelope.  If you spend here and there at Bath & Body Works, make a Bath & Body Works envelope.  You’ll see quickly why it is crucial to account for all of your spending.

The blow money: What is it?  I highlighted this envelope above because this system isn’t about having no fun, and spending no money.  It’s about controlling and accounting for what you spend.  My blow money envelope is where I save up to have some fun.  I can do whatever I want with this envelope.  My favorite uses for it are going to the movies, going out to eat, buying an occasional shirt or new pair of shoes, or saving it up to go to a fan conference, academic conference, etc.  This is money you’re allowed to spend and have no guilt.

One of the major reasons people fail at budgeting is they don’t budget for fun, and then they get frustrated and throw the whole system out of the window.  I’ll repeat it: the whole point of this is to document and account for your dollars, not rob you of a life.  It’s up to you what categories you want, and how much you want to put in them. When you realize just how much money you need to fund an expensive hobby or (the biggest culprit) eating out, it’s up to you whether or not you want to cut that out of your budget and funnel that money into another envelope.  Surely, if your expenses outweigh your income, you need to start making some cuts. Here are my usual categories:

  • Rent
  • Studio Rental
  • Cell Phone
  • Electric Bill
  • Cable Bill
  • Car Expenses (tickets, repairs, etc)
  • Groceries
  • Laundry… sadly I live in a building from 1920 so we have no laundry hook-up
  • Eating Out
  • Blow Money
  • Christmas

You can add or subtract categories each month.  Every month, cash your paycheck, or withdraw your money in cash.  ALL of it.  Every last cent.  Remember, you have $1,000 socked away in emergency money so this shouldn’t be too hard.  Just be sure that you don’t have any electronic debits still attached to your bank account that will put you in the red (learned this the hard way)!  Get the cash in 50’s, 20’s, and some 10’s.  That should be good enough to divide it into the envelopes.

My envelopes
My envelopes

Extra cash goes in an envelope called “Savings,” add it to your emergency fund, or put it into your debt snowball, which I’ll talk about in another post.  Once every envelope is filled, put them in your locked or secure location until you need the money.  If you are going shopping and you allow yourself $400 / month for food, only take $100 if you go every week, or $50 if you go twice a week.  Only take out the cash you need and put it directly into your wallet.  Some people like having a wallet that fits the business size envelopes.  You can also get Dave Ramsey’s wallet that has mini envelopes built in (I have it and love it)!  Another idea is to roll up the bills and put a different colored paper clips around them.  Rachel Cruze budgets this way.

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Dave Ramsey’s Awesome Wallet!

There is no taking from one envelope to fund another category where you have run out of money.

If you spend all of your blow money in the first two weeks – that’s it.  Your fun is over until next month.  Don’t even THINK about dipping into your gas money, food money, etc.  When the next month rolls around, you might decide to put more money in your blow envelope to compensate, which is fine.  It’s okay to adjust. The categories that are traditionally under-funded by newbies are “blow,” “food,” and “gas / car.”  The category that tends to break people’s banks, where they end up spending HUNDREDS of extra dollars (I’m talking like, $500-$600 a month) is “eating out.”

Once you write down your budget and you are completely horrified by how much you spend in some of those categories, you can check back here to see how I save.

The “Christmas” category is optional, but I’m a giver so I like to have $200 or so to buy Christmas presents for immediate family and send out cards to others.  I also like to visit friends and family in New York City and on Long Island around the holidays, and that can get expensive.  It’s nice to have a hunk of cash to throw at subway cards, train tickets, city shopping, and some apple cider donuts.

If you don’t have enough income to afford this category, it might be an incentive to pick up some extra work.  Or just nix it.  It’s up to you.  It doesn’t matter how much you put in each category – just make sure to write everything down.  That’s the beauty of the whole system!

DebtIsDumb on Youtube makes envelopes out of pretty scrap paper and a template.  She uses it as a way to involve her daughters and teach them about the envelopes at the same time.  I might try this when my boring ol’ white-ies run out.  What system do you use to do your budgeting?  Let me know below!

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