how to save money with the envelope system
How to Save Money with the Envelope System
The Envelope System, popularized by Dave Ramsey, is a take on a budgeting system that most people have been following religiously and quite successfully. Find out how you too can use this system to plan and save your money responsibly.
Make a separate envelope for all the change that you accumulate. Count it after a month or two and you'll have a decent amount as ready-made savings.
- Income: The money we get for work we do
- Expenses: The money we spend on things we need
- Necessities: Things that we absolutely cannot live without [the bare minimum include food, clothing, shelter (and today, the Internet)]
- Luxuries: Things we can or cannot afford, but still end up spending on, simply because we have the means - plastic money
- Debt: What we find ourselves in because we cannot (or do not want to) decipher the difference between necessities and luxuries
- Financial Crisis: What happens when our debts continue to mount due to excessive spending on luxuries
- Breakdown (Financial, Emotional and possibly Physical): The result of ever-increasing debt and no means to repay it
- Envelopes (number depends on items mentioned in step 1)
- Pen or pencil
- Notepad
Step 1
Fix a Budget
The word 'budget' has come to have such negative connotations that people simply don't want to use it anymore. A budget is "the money that is available to a person ... and a plan of how it will be spent over a period of time", as per the Oxford Dictionary. It's a seemingly harmless, yet extremely loaded word. The first step towards managing your spending is having a plan of how much money you have and how you need to spend it, not intend to spend it. How to do this? First, in the notepad, make a note of the amount of money that is due to come in. Using this as a base, make a list of all the assured expenses you have until the next inflow of money. For instance, your income is USD XYZ. From this XYZ, subtract fixed expenses, like mortgage/rent, food, cable, fees, phone, and other bills, etc. If these figures are not fixed, take an upper limit and write it against the item.
Step 2
Make Envelopes for Each (Fixed) Item
Once you have the breakdown of the expenses, you have to physically divide the money into different sections. Then pick out an envelope for each item. Write the name of the item on the back of the envelope along with the amount of money you're putting in it. Put only the allotted money into the envelope. Repeat for all items on the list and keep these aside.
Step 3
Make One for Emergencies and Contingencies
Your son hurts himself and you have to rush to the ER; your car breaks down and you need to have it towed―you can never predict when such things will happen. Hence, it is important to keep some money aside for them. So, mark another envelope for emergencies, and put the assigned amount into it.
Step 4
Keep Some Fun Money Aside
After deducting the amount assigned to emergencies, whatever money remains, you take a call on how much you want to keep aside for yourself, just for fun. You may find your dream purse or the perfect tool kit on sale! Don't let a money management plan get in your way. Keep an amount aside for such opportunities right at the start, so you know that you can afford it, thus, avoiding the guilt that accompanies impulse shopping. What if the amount assigned is insufficient for this dream purchase? Simple, don't buy it!
Step 5
Don't Overspend
The success of the Envelope System is solely in your hands. The key to making it work is resisting the temptation to overspend. The whole point of assigning an amount to every single thing that you could possibly spend on is to make sure that you don't overshoot that amount. So, once an envelope is empty, you know that you cannot afford to spend more money on that particular item. If the money's gone, it's gone. Do NOT steal from another envelope, not even the emergencies and contingencies one (unless the situation you're in fits your description of an emergency or contingency).
Step 6
Make Way for Savings
If you do abide by all the steps given above, chances that you'll have some money to spare are more than high. How? Well, let's see:
✔ When you allot a budget to yourself, you're making a promise to yourself that you won't spend more than that much on an item.
✔ As a result, you begin to pay more attention to whether you actually need the item.
✔ If yes, the next thing you look for is whether there are inexpensive alternatives available.
✔ If yes, then great! If no, then you'll begin to look for items that you've included in the list, but can be postponed for the time being.
✔ Thus, you have already budgeted that amount to the item for the next cycle (so don't forget to add this amount there).
When you do this for everything, you'll realize how much extra money you spend on things that you think you need, but don't.
Be honest with yourself when using this system and you'll see that its effectiveness lies in its freakish simplicity. You allot money to an item, you use it on that item, you keep some aside for a rainy day, and have fun with some. That's all there is to it. Don't be discouraged if this stringent method doesn't work its magic instantly. Give it a couple of months, and you'll surely reap its rewards!