The envelope system, I’ve never talked about it on the blog because I don’t use it. But I’ve heard so many good things about it that I had to mention it. Usually, I don’t like to talk too much about what I don’t practice. But I’m making an exception, because it seems that the envelope system helps you manage your budget in a very efficient way. Several people have told me about it, and I will tell you what they told me about their experience.
Moreover, it is an old method, and I really like old methods full of common sense. They have proven themselves.
So if you’re looking to increase your savings, this tip will certainly help you!
Saving with the envelope system: how does it work?
It’s a matter of leaving your credit card in the closet and withdrawing the amount you need each week for everyday expenses. Instead of paying for everything by credit card, you pay in cash. By handling the money, you have a better idea of what you are spending.
The money is divided into envelopes labelled “shopping”, “leisure”, “clothing”, etc. The money is then sent to the bank. Take the envelope with you when you need to make a purchase and pay in cash.
As you spend money, you see the money getting smaller and smaller in the envelope. So you are less tempted to spend than with a credit card.
I think that this method can be very effective because it gives a clear picture of the money we have left for a particular item of expenditure. And when there isn’t much left, we are pushed to be careful.
It is a system that concerns everyday expenses, but not the bills that we pay by direct debit or bank transfer, such as housing, insurance, telephone and internet contracts, etc. But it is precisely the small everyday expenses that can multiply without our paying attention when we pay by credit card. The envelope system is a good brake.
How to use the envelopes concretely?
To be able to use the envelope system, you need to know exactly how much you earn and (at least approximately) how much you spend.
- Add up your income (revenue) to find out exactly how much money you have available.
- Remove from your income the automatic withdrawals and compulsory expenses that correspond to your recurring bills (gas, electricity, telephone, internet, rent/loan, insurance, etc.).
- What’s left over is the money needed to: go shopping, buy clothes, treat yourself to a few hobbies and little pleasures, and put some money aside, etc.
- Subtract the savings that you have decided to put aside.
- Divide the remaining amount by 5 (because there are about 5 weeks in the month, rounding off). This will give you the weekly amount you can spend on shopping, entertainment, clothing, etc.
- Each week (or at the beginning of the month), go to the ATM and withdraw the amount you have decided. You will put it in envelopes. Each envelope corresponds to a category of expenditure (shopping, leisure, etc.) and it is up to you to decide how you want to divide it up. The easiest way to do this is to add up all your expenses for last month’s errands, leisure and other expenses and divide them by 5.
At the end of the month, if you have money left over in some envelopes, take the opportunity to add it to your savings.
When an envelope is empty, try not to transfer money from another envelope into it. The “game” is to cut back. So when there’s no more money, you don’t spend any more. Well, don’t starve anyway ?
Here’s one more string to add to your bow to increase your savings!
For more efficiency, I suggest you also use a paper chart or Excel to do your accounts.
You will find here a table to print and fill in by hand.
You use the envelope system and would like to add some precision to this article? Tell me in the comments!