The Envelope System

Now that you've made your budget, you'll want to make sure you stick to it and don't overspend. A great way to do this is to go on the envelope system. Basically, you'll be labeling a bunch of envelopes with different categories, putting in the budgeted money, and spending only that amount of money. There is something psychological about having all your cash out in front of you that makes you not want to let it go. In today's card-swiping culture, people don't really register the amounts of money they're paying. But on a cash system, paying for things hurts a lot worse. On average, people who switch to a cash system spend one-third less each year. Here it is in steps:

1. Budget each paycheck – I went over budgeting in my last post, so for more specific budgeting information, please refer to that.
   
2. Sort your expenses – There will be bills that you can't make envelopes for, like bills paid by check or automatic withdrawal. You can create categories for food, gas, clothes, and entertainment. Be sure to only create categories that it makes sense to pay cash for.
   
3. Put in the money – Now it's time to actually take all your cash and divide it up in your envelopes according to your budgeted amounts. For example, if you budgeted $250 for food, put $250 cash is the envelope marked "Food".
   
4. Once it's gone, it's gone – Once you've spent all the money you allotted for one category, you can't spend any more money in that area. If you go out and blow all your clothes money in one day, that's it. You won't allowed to spend any more on clothes for the month. That means no trips to the ATM to get more money.
   
5. Resist urges – While paying with debit cards doesn't usually land you in a pile of debt, they can make you overspend. Like I said earlier, paying cash hurts more than swiping a little plastic card. When you spend cash only, spending less and resisting impulse buys becomes a habit.
   
6. Give it time – It will take a few months for you to perfect your envelope system. Don't give up after a month or two if it's not clicking. You'll get the hang of it and see how beneficial the envelope system is as you dump debt, build wealth, and achieve financial peace! See ... simple!
   

Certainly, some bills may come in at different times of the month, so you'll need to adjust your written game plan to take it one step further. You need to plan the budget based upon your pay periods. Say that you get paid twice a month. If you can write down which bills you plan on paying from each paycheck, you will not be left with a surprise bill. Spend each month's income and each individual paycheck on paper before it comes in.

If you can afford it, and you and your spouse can agree on it, make an envelope just for money to have fun with! This fun money can be anything you want to be, and there are no rules on how you spend it.

Alright, so after you've got your envelopes and you've been using them for a little while, you discover you're spending less money in almost all categories. So what do you do with the leftover money? One option, probably the best one, is to take all the extra money at the end of the month and deposit it into an interest-bearing account, whether it be a standard savings account, a CD, a money market, or even an IRA. Also, if you need to you can take the extra money and add it to categories that need a little extra cash, but you should still be saving as much as possible!

Much of this article was written with information from Dave Ramsey's website. The envelope system is a key component of his Total Money Makeover system, which is worth a look.

The Total Money Makeover: A Proven Plan for Financial Fitness