Episode: 327 - Revolutionize Your Budgeting with the Envelope System
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What do school supplies, Christmas gifts, and car repairs all have in common? They are recurring expenses that often catch us by surprise. Many people find themselves unprepared financially when these expenses appear. Imagine being shocked each year by the cost of school supplies or scrambling for cash during the holiday season. Or maybe you find yourself needing new tires and resorting to financing because the cash isn't on hand. By adopting a simple yet powerful budgeting tool known as the Envelope System, you can eliminate these financial surprises and regain control over your budget.
Understanding the Envelope System:
The Envelope System, also known as cash stuffing, is a method to help you manage your finances more consciously. Here's how it works: Begin with a stack of envelopes, each labeled with a specific spending category such as groceries, entertainment, car repairs, Christmas, or birthdays. At the start of each month, you decide how much cash to allocate to each envelope. The goal is to only spend the cash available in each envelope for its designated category. Once the money is gone, spending for that category stops until the next month.
For instance, if you spend an average of $600 per year on Christmas and birthdays, allocate $50 each month to the corresponding envelope. This way, when these occasions arrive, you already have the funds set aside for expenses.
The Impact of Cash Spending:
There is a distinct psychological impact when using cash instead of cards. Physically handling and spending cash makes you more aware of your expenditures. The act of giving cash is a stronger reminder of spending limits compared to swiping a card, prompting more mindful purchasing decisions.
Moreover, the Envelope System promotes proactive financial planning. Instead of worrying about recurring expenses such as school supplies, you've been saving each month, ensuring the cash is available when needed.
Managing Variable Expenses:
To tackle variable expenses like groceries, calculate your average spending over recent months and set that amount as your monthly envelope budget. Adjust the budget as needed—if consistently finding leftover cash, lower the allocation. If frequently running out, consider increasing the amount in that envelope while reducing others.
Timing and Implementation:
A great time to implement the Envelope System is during tax season when many receive lump-sum tax refunds. Instead of letting this money fall into general expenses, use it to jumpstart your envelopes. Fully fund categories like groceries, clothing, or irregular ones like car maintenance. This approach helps avoid the stress of being unprepared for inevitable expenses.
Overcoming Inconvenience:
While carrying cash might seem inconvenient in today's digital age, consider the long-term benefits. What's more inconvenient—a few extra ATM visits or enduring months of financial stress? The system forces you to prioritize financial wellness, demanding minor adjustments in routine for major benefits.
One compromise can be for categories like gas, where using a debit card may still be the practical choice due to the inconvenience of physically handling cash at fuel stations. Every individual can tailor the system to fit their unique needs.
Conclusion:
Challenge yourself to implement the Envelope System for a few months and experience its impact. Start with key categories, making use of tax refund season for a financial boost. As you do, you may discover a noticeable difference in your financial discipline and peace of mind.
By consistently planning for expected and unexpected expenses, you can navigate your financial landscape with confidence and avoid the stress of unplanned debt. This system is designed to help you stick to your budget, ensuring you remain prepared and financially healthy throughout the year.
Resources Mentioned
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Transcript
Ryan Nelson:
Back to school supplies, christmas, birthdays, groceries, car repairs. What do all of these things have in common? Well, all of these things are common expenses we deal with on a weekly, monthly or yearly basis, and yet many of these things surprise us when they show up. I remember, year after year, being shocked at the school supply costs, or that Christmas came right around the corner and not having the cash to pay for stuff. Or when my car needed new tires and having to take out the financing for them because I and not having the cash to pay for stuff. Or when my car needed new tires and having to take out the financing for them because I didn't have the cash. Well, today we're diving into a simple yet powerful tool that can change all of that, and it's called the envelope system, or you may have heard it referred to as cash stuffing, and it's about to revolutionize the way you budget. So stay tuned. My name is Ryan Nelson, and my wife and I paid off $160,000 in debt over eight years while we were raising three kids, and I got to tell you we love the envelope system and we still use it to this day, even after being out of debt for over four years. It makes it so easy to pre-plan all of the things you don't really think about until you need them. And so from my experience, besides setting up our first emergency fund, this is the single biggest thing that my wife and I did that helped us stick to our budget consistently, and it also helped us cut down on our money fights and our disagreements.
Ryan Nelson:
So let's explain the envelope system if you're not familiar. So let's imagine you have a stack of envelopes, each labeled with a different spending category. They could be groceries, restaurants, entertainment, car repairs, christmas, birthdays and so on. At the beginning of each month you decide how much cash you're going to allocate to each category. So let's say, for Christmas and birthdays, you spend an average of about $600 per year. You would physically stuff $50 each month into that corresponding envelope. So for 12 months times, $50 is $600 for the year, and so when a birthday or Christmas pops up or comes up, you would be able to take the cash out of the envelope and make that purchase, and that same concept would apply for each of the other envelopes. So here's the key Once the money in that envelope is gone, you're done spending. You basically are not allowed to spend anything else that month for it.
Ryan Nelson:
So let's think about groceries. If you allocate, let's just say, $100 a week in groceries and you take your $100 a week and you go to the store and you spend it, you're not allowed to go back to the grocery store because you spent money out of that envelope for the week. So why does that work? Why does this make a difference? There's something about handing over cash that makes you think twice and, honestly, when we first started doing this with our groceries, it made us really aware of what we were spending in the store, because I only had cash to pay. I couldn't be five, 10, 20, $40 over and pay for it with a debit or a credit card. And that's because it triggers a different part of our brain than when we're swiping our card. We actually feel the money leaving our hand and it's a reminder of your spending and it makes you more mindful of what you're purchasing. It also works because it helps you plan ahead for the year, instead of panicking over school supplies like I've done, or panicking over Christmas. You've been saving each month. So when school supply shopping happens that one time a year, you've been saving up for the year and you have the cash to pay for it. So what about things like variable expenses?
Ryan Nelson:
I've talked a little bit about groceries. Let's say your grocery bill varies from week to week. So one strategy would be to average your grocery spending over the past few months and use that as your monthly envelope amount. So if you're averaging for the month $600, you would average $150 a week for groceries. It means one week you might spend $200 and another week you might spend $100. Leftover funds, which means month after month after month, you're having more left in your envelope than what you're spending. You could potentially adjust your spending down for the groceries and allocate that money somewhere else. And if you're consistently running out meaning that you spent 150 for the week and boy, I still need stuff at the grocery store and that's consistently happening Well, that might be a key where some of the envelopes you're funding. You would maybe reduce those a little bit and increase your grocery envelope.
Ryan Nelson:
So let's talk about timing. You may ask yourself like what's a great time to set up your envelope system? And I will say for us it was during tax season and if you're like millions of Americans, you're probably thinking about, or maybe you've already received, your tax refund and it's a great opportunity to get this started. Your tax refund is going to be a lumps up of money that can help you get a jumpstart on your budgeting goals. Instead of letting it disappear into your general bank account, where inevitably it will get absorbed into everyday expenses, why not use it to pre-populate your envelopes? So I think and this is 100% for me and my wife I think we had our tax money spent 10 different ways before we received it, and we used to do that all the time before we really took control of our finances.
Ryan Nelson:
So instead of immediately spending it or thinking of all the ways you're going to spend it, you can sit down and allocate a portion to each of your envelope categories. For example, you could fully fund your grocery envelope for the month. You could fully fund your clothing envelope or even a dedicated envelope for irregular expenses like car maintenance or gifts. Like you might know that your tires are going to be replaced later this year, so you could go ahead and fund that ahead of time or get a lot of money in that envelope in preparation for that. Because when you're first starting the envelope system especially if you're brand new to it and you've never done it you might start it around school supply season where you haven't been saving for school supplies. So when the school supplies come you might only have $50 in there, and so that's not enough and so right away you're kind of already behind the eight ball. So having that lump sum of money from tax season can really help you get the envelopes funded ahead of time so that you can kind of have success running out the door. And by doing this you're not only setting yourself up for success, but you're also taking the pressure off of those first few weeks or months of budgeting. You're not scrambling to withdraw cash or use a credit card or feeling stressed about running out of funds. You've already given yourself that head start.
Ryan Nelson:
This is one of the most common objections to the envelope system is that carrying cash is not very convenient, which I agree. There is some inconvenience with it. I'm not going to sit here and say it's not inconvenient. It is in the digital age. But think of it this way what's more inconvenient, like that few extra minutes at the ATM or months of stress and debt? The envelope system is about prioritizing your financial well-being, even if it means making a few small adjustments to your routine. Now one of the inconvenient things that we did not do is when it came to gas, we continued to buy our gas using a debit card, because, from an inconvenience standpoint, it is inconvenient because in today's day and age you can't just fill up and go in and pay. You have to go in and give them a certain amount and then you can only fill up to that amount. So, from our perspective, that is the one area where we never had an envelope, but that may work for you if that's something you want to do.
Ryan Nelson:
So I want to challenge you to try the envelope system for just a few months. Use this tax refund season as a way to get a jumpstart on it. Don't go spending your tax money on something and then you're frustrated a few months from now because you don't have the money. Start with a few key categories and just see how it goes. I think you're going to find like I did and that my wife did it's going to make a huge difference in helping you stick to your budget. Hey, if you want weekly tips, stories and helpful information delivered to your inbox each Sunday afternoon that helps you take control of your personal finances, sign up for our weekly newsletter Simplify my Money and we are going to be releasing an upcoming newsletter that's going to take a more in-depth look at the envelope system. The link to sign up for that is in the show notes. Thanks for joining us today and we will see you on an upcoming episode.
