The Envelope System of Budgeting

Posted on April 22nd, 2015 by Discount Debbie

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Debit and Credit cards are kind of amazing. You dump of bunch of tomatoes or whatever on a conveyor belt, a cashier shoves them in a bag for you, and you swipe your little piece of plastic through a machine, and bam. Your tomatoes are paid for, even though neither of you ever saw actual money used in the transaction.

The problem with this is that when you don’t see the money, it’s hard to realize you are spending it. Years ago when people used checks to pay for everything, you weren’t exchanging physical money, but you still had to write out a number on a check, pass it to the cashier, and then write down what you spent in your checkbook. Physically writing “$40.00” on a check and then “-$40.00” in your checkbook kind of made the loss of that $40 tangible. But with debit and credit cards, you glance at the number that is your total on a small screen for a moment, swipe the card, and that’s that. It can be hard to feel attached to that $40 when you don’t really get to visualize it. Many people end up spending more than they intend because of this.

Enter the envelope system of budgeting. It’s a type of budgeting recommended for people who need to feel attached to that money in order to rein in their spending. Say that after paying bills, rent, etc, you have $500 for the rest of that month. Figure out what you need that money for—say, $300 for groceries, $100 for new clothing or shoes, $100 for eating out/other incidentals. Withdraw $500 in sweet, sweet cash from an ATM. Bust out a few business-sized envelopes. Label each one “Groceries,” “Clothes,” etc, and put the amount you’ve budgeted into each one. Do not tell anyone you have $500 in cash lying around your home, but bring the appropriate envelope along when you go shopping. Perhaps you’ve mentally budgeted $80 for shoes. But at the store you see a pair marked down from $200 to only $120, and that’s more than you wanted to spend, but it’s such a good deal! With a debit card, it’s easy to mentally discount the extra $40 you didn’t budget and just buy them anyway, but with the envelope system, you have $100 in cash and that’s all. You cannot spend $120 on shoes! The envelope system doesn’t work for everyone, but it is a good option for many, many people who need to visualize what they spend.

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