Slow down and simplify

How to use the envelope system to get on top of your finances

Jar with coins to illustrate the envelope system

I’ll never forget the feeling, staring at our bank account. Our work had dried up completely and we didn’t know where our next pay-cheque would come from, only that it wouldn’t be arriving anytime soon. This wasn’t the first time. In my 20’s, as a care-free backpacker, I’d faced this situation more than once, but this time was different, I had a mortgage and a baby.

Even the smallest financial transaction was fraught. We had to make that money last. There were some sleepless nights and there would have been many more, but for the peace of mind I got from an old school money management technique – the envelope system.

The envelope system

A couple of months prior, seeing our cashflow take a dive, I implemented the envelope system. The envelope system is a cash budgeting method. In a nutshell, you have a set of physical paper envelopes, one for each of your budget categories. You label each envelope with a category and its budgeted amount. At the start of your budget cycle (ours was weekly), you withdraw your total budget from the bank in cash and split it between the envelopes. A first, our envelopes were not even envelopes, I made pockets out of scraps of paper and sticky tape.

Making budgeting real

The reason the envelope system is so enduring is because it works. My husband is a reformed spend thrift, making a budget and sticking to it was not in his nature, but he’s full of praise for the envelope system. The beauty of the technique is that it makes budgeting and spending tangible. A cash budget provides physical limits to your spending. Spending cash is generally less convenient than using cards and it just feels different. Psychologically, it’s harder to part with cold, hard, cash than it is to have it debited from your balance. Using envelopes forces you to develop a realistic spending plan. The consequences of overspending are clear and immediate – you need to decide which other envelope you’re going to raid to cover your purchase.

Helping you sleep at night

While my husband loved the tangible benefits, for me the intangible benefits are why I recommend the envelope system. When times were tight, at least I knew the essentials for the week were provided for. When the power bill arrived, there was no need to panic, I already had it covered. When more occasional things popped up, like a trip to the doctor, I had a bit stashed away for that too. In a precarious financial situation, those little white envelopes provided much needed comfort. 

Setting up and administering the envelope system take work, but it’s worth it. It provides a routine around managing your money. Years later, I read something by Gretchen Rubin about managing difficulties by making a time to worry. This sounded pretty ridiculous on first reading. But then it clicked, that was exactly what the envelope system did, it gave me a structure for worrying about money. Rather than constantly catastrophising, I channeled my worry into sorting out my envelopes on a weekly basis. 

Making the envelope system work in an online world

Cash budgeting might be old school, but with a few simple tweaks you can easily adapt it to work with online shopping and internet bill payments. 

  1. Use a “float” envelope

Have an extra envelope that functions like a bank or float. When you make an online transaction, shift the amount from the relevant envelope to the float. At the start of your budget cycle, check your float. Subtract the amount of the float from the amount of cash you usually withdraw for the budget cycle.

  1. For large categories, consider separate bank account

For categories where you’ll get to a point where your envelope will hold more than the total amount of your budget cycle, consider a separate bank account instead. For us, that was insurance and rates (property/council tax). It saves a trip to the bank with the envelope contents before you pay the bill online.

Need more help curbing your spending?

Setting a budget is all good and well, sticking to it is another matter. For tips on how to be more intentional with your money, check out:

What do you find the hardest part of sticking to a budget?

No Comments

    Leave a Reply