Envelope Budget System

Having difficulties tracking your budget?  Have you mastered the budgeting process only to find out that you go over your alloted amounts on a monthly basis due to poor tracking skills?  One way to combat this problem is to utilze MS Excel to its potential by downloading your online banking activity on a weekly basis (every Sunday night works best) and tracking your debit card purchases through your bank account online.  This is currently how we track out expenses versus our budget. 

A more strict way to track your budget-to-actual expenses is to adopt the envelope system.  According to Dave Ramsey, he “found out that Grandma’s way to handle money still works.”

The envelope system is a key component to his Total Money Makeover Plan, and is summarized below.  The envelope system is also another way to get yourself on the right track to Run Your Life Like A Business.

1. Budget each paycheck.  The theory behind this is that every penny that you make should be earmarked for spending or saving.  Each time you are paid, you should automatically pay yourself first (savings) and know exactly how much from each paycheck is allotted to groceries, dining out, household items, mortgage payment, car payment, etc.

2. Divide and conquer.  All bills should be earmarked first, and these items are not included in the envelope system.  I prefer to use online banking to pay ALL of my bills, including mortgage, all utilities, student loan, and when we had them our auto loans.  For the rest of our expenses, such as groceries, dining out, entertainment, household, etc., you must divide up the envelopes and write the title of the category on the outside of the envelope, utilizing the same titles that you use in your budget.

3. Fill ‘er up.  After you have your envelopes with the appropriate category titles, fill up each envelope with the money earmarked for it in your budget, i.e. groceries $100 for the week. 

4.  When it’s gone, its’ gone.  This is the key aspect, one which is difficult to track when downloading your banking activity online on a weekly basis.  When all of the money you’ve spent in the envelope is gone, don’t dip in for more from another envelope and don’t go to the ATM for more withdrawals.  If there is money left over in an envelope at the end of a period, I would deposit it directly into your savings account, as an added bonus.

5.  Don’t be tempted.  Dave says that debit cards can cause people to overspend, due to the psychology and ease behing using the card.  He says there is something psychological that hurts more when spending actual cash, and thus why this system works better than using your debit card for all purchases.

6.  Give it time.  Dave says it may take a few months to perfect your envelope system.  The key is “Don’t give up, don’t ever give up.”  Once you get the hang of it, it will become second nature and you will be teaching others how to utilize the envelope system to its fullest.

As stated previously, we do not use the envelope budgeting system, but I am very intrigued to try it for a month.  I am thinking that January 2009 might be a good month to test the waters.  I’ll let you know if we go through with it, and how it works out.