How to Manage Your Money Using the Envelope System

The "Envelope System" is a way of managing a cash budget. It was made popular by Dave Ramsey, a popular finance guru, but it has actually been around for a long time. Many people used the envelope system during and after the great depression because they did not trust banks. It has become popular again due to the same mistrust of banks and credit cards and to help people actually "see" the money they were spending.

The first step to using the envelope system is to create a budget. Count all of the money your bring in and decide how it is to be spent. Common categories for a budget are rent or mortgage payments, car, insurances, power, phone and cell phones, gas and electric. While most people consider these bills they have to pay every month, they fail to budget for clothing, donations, food, entertainment, gasoline, car repairs, savings, emergencies and mad money. This is why they get over their heads in debt. While you can create an envelope for every category, it is the latter set of categories used for daily living expenses that you MUST create envelopes for.

On each payday, the amount of money to be allocated to each expense should go into the appropriate envelope. To determine how much money you will need for each envelope, it would be wise to look at bank statements and receipts for the last few months to determine what you have been spending, minus any expenses that have been clearly wasteful.

Using colored envelopes will help you to grab money from the right one at all times, but if purchasing them is an unnecessary expense, you can use colored markers to write on the front of each envelope.

Do not neglect to put cash into your mad money and emergency envelopes. You don't want to end up in a lurch should you need get a speeding or parking ticket, or you break your computer. As for mad money, you will quickly become depressed or begin to pilfer from other envelopes if you don't put aside any money for yourself.

As you spend money from each envelope, be sure to put the receipt in the envelope you took the money from. This way you can reconcile that you are not wasting money, and find out if any adjustments are needed.

If keeping cash on hand makes you uncomfortable, consider using fake money with your envelopes and writing checks. You will need to remove your fake money from the appropriate envelope as you spend it, and to only spend money based on what is allocated for each envelope or category.

Some envelopes won't be used up every month, but instead be allowed to accrue money for when it is needed. Car repair, home and appliance repair, and misc. emergency envelopes should be contributed to each month and only pulled out when needed.