Following up on my how to create a budget article, I want to share with you a budgeting method called the cash envelope budgeting system. The envelope system of budgeting has been around for long time (it’s believed to have started during the Great Depression). However, it became more popular when Dave Ramsey preached it to his followers as the Dave Ramsey’s Envelope System.
How To Use A Cash Envelope Budgeting System
The idea behind this system is very simple and powerful. It assumes that you handle your income and expenses in cash — which is good because Dave Ramsey wants you to cut up your credit cards anyway. When you cash your paycheck, you put money in envelopes that represent various categories of household expenses — e.g., rent, food, medical, entertainment, clothes, utilities, etc.
You label these envelopes, put the budgeted amount inside, and write the starting amount on the envelope. Whenever you pay for something, you take the money out from the appropriate envelope and write down the new remaining amount. For example, if you start off with $400 in your food envelope and you take out $50 for grocery shopping, cross out $400 and write down $350. If you have change, you can put it back in the food envelope and update the amount, or you can put it into a savings envelope to pay yourself.
The basic rule is that you don’t spend more than what you have in each envelope, and you don’t steal from other envelopes (if you can). The idea is very simple, but I can see that it will probably take a few months to perfect the system. For example, you’ll to make some adjustments to make the system fits your situation if you use credit cards, make automatic payments, have some irregular expenses, etc.
Envelope Budgeting System Video
If you’re a visual learner, this video from NCN Blog will do a better job of explaining the system than I could.
It’s important to note that this system is an extension of the standard budget that I discussed previously. You still need to follow the 7 steps to set up your budget. The cash envelope budgeting system simply makes it easier to follow your plan because it’s more interactive than tracking everything on a piece of paper.
Pinyo is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.