Dave Ramsey’s envelope system is probably something that you’ve seen around the Baby Steps, as it’s nothing new. You may be on Dave Ramsey Baby Step 1 or Baby Step 2 and wonder whether you should use this system to help reduce expenses.
Dave Ramsey described it as one of the most radical and effective methods to budget. If you don’t know how the method works, let’s help you understand it.
What Is The Envelope System?
Dave Ramsey describes it as a method of keeping track of your budget category by tucking your cash away in envelopes. This way, you simply need to peek in your envelope to see how much into your budget you’ve gone.
Understanding The Dave Ramsey’s Envelope System
Dave Ramsey believes that one of the reasons we overspend is that nothing informs us when we’ve reached our budget limit. And that’s why he designed Dave Ramsey’s Envelope. It’s a tool that is effective in helping you stick to your budget. Here’s how Dave explains how it works:
1. Create Categorize In Your Budget And Assign A Cash Envelope To Each Category
You should use the envelope system for expenses that seem to regularly overshoot your budget. Things like restaurants, groceries, entertainment, clothing, and gas are common budget busters.
You can choose any budget category to assign an envelope, but here are some categorize that Dave really thinks you should consider:
- Restaurants
- Car maintenance
- Gifts
- Personal
- Entertainment
- Health
- Makeup/hair care
- Groceries
- Gas
- debts
2. Figure Out An Appropriate Budget Amount
Suppose you realize that you often overspend on things like entertainment, groceries, etc. Find ways to reduce your budget amount and stick to that figure. If you’re married, then ensure that your spouse has adequate knowledge about your budget plans and any readjustment.
Make sure your budget is flexible so you can easily make the necessary adjustments without causing you some financial trouble in the long run.
However, if you think your budget needs a boost to cater for all the necessary expenses or adjustments, then you may think of some ways to increase your income stream. This is where passive income jobs come into play. If you have a regular day job but you still want to make extra income, jobs like taking paid surveys can be a great way to start.
For example, there are many best survey sites where you can answer and get paid for your responses. Just browse through the Internet and look for some potential sites to make money online. Remember, by having streams of passive income, you can set up an appropriate budget amount that can help make your envelope system efforts more successful.
3. Have A Cash Envelope For Each Budget Category
Assuming you’ve budgeted a sum of $500 monthly for entertainment. Dave Ramsey suggests that you should take out $250 when you get your first paycheck. Then another $250 when you get your second paycheck of the month. You should put the cash in a designated envelope. Write “entertainment” on that envelope. That’s envelope contains your $500 entertainment budget. Straightforward right?
Ensure that your budget is adequate for expenses in each category. And you should always make sure that you stick to your budget.
I know, I know—sticking to a budget is difficult! However, it’ll leave you with a more desirable financial life than just deducting money from your account. Dave notes that a major mistake people make is that they don’t return their change into the envelope. Avoid this mistake. Dave further advised that no money should come out of the Entertainment envelope except you’re paying for entertainment. Even if you’re at the cinema and you mistakenly left the envelope at home. Turn back to pick it up. Make sure to do this process seriously so you can manage your finances without worries and achieve financial independence in no time.
4. Only Spend From Each Cash Envelope
Have this in mind: When your cash is gone, it’s gone! If you have a date, but you’ve emptied your wallet, it would be better to just sit at home. This is one of the good ways to help you control yourself and your spending habits. Though there are also some disadvantages to using cash envelopes as well. So let’s go over the pros and cons of using the envelope system. Consequently, you can avoid the possibility of mismanaging your budget on a monthly basis.
Pros of The Envelope System
Using the envelope system has many benefits for you as your budgeting system. Such as learning how to control your spending. When using the envelope system, you get the chance to see where you struggle with your money in each category and how to improve on it. Once starting, it will become an easier routine for you as you discipline yourself. When using credit cards, you don’t see how much you are spending. So when using the envelope system, it becomes more clear on how much you are spending and being aware of your money.
Another pro about the envelope system is being able to always have cash with you. In case of an emergency, you can have an envelope specifically meant for emergencies and you don’t have to worry about using the money from another envelope you may have. Though, if you do need to use money from another envelope for something else, you have it right in your hands! No need to worry about trying to transfer money over online and having to wait for it to transfer over. Just more convenient and smoother to manage cash. As well as easier to budget for you. It is also better when you don’t have to worry about any overcharges or online subscription fees you may have forgotten to stop before its monthly charge.
The envelope system can be a great method to keep up with budgeting, work on spending habits, and be convenient to use though there are some cons to using it.
Cons of The Envelope System
Even though the envelope system can be amazing to use, there are some disadvantages to add as well. One con about using the envelope system is that nowadays, many places don’t accept cash anymore. Many places find it just more convenient to use credit cards so that way they don’t have to worry about dealing with cash or fake bills. It can become inconvenient if you are shopping around or getting gas if they don’t accept cash and only card.
Another downside to using this system is being careful holding a huge amount of cash on you at all times. Since you only are using cash, you have to carry those envelopes around you have to be more aware of your surrounding on who is watching you. If you were to get rob, well there goes all your money and that would be unfortunate but it happens. You can also lose track of your money easier if you misplace it as well. Having all that money can become a burden to take care of if you aren’t the most responsible person. It is something you have to consistently be checking on and counting to make sure you have the right amount of money. Which is not fun to do all the time.
This system has many great potentials about it but it is up to you to decide what you think about it knowing the pros and cons to it.
Would We Use The Envelope System?
So what do we think about using the envelope system? Well given now that technology has grown and become a huge part of our lives, the envelope system is outdated.
Dave Ramsey’s opinion is that the envelope system works better with a purchase made with physical cash than via technology. Paying for movie tickets, going to nightclubs, or even shopping at the grocery store with cash at hand helps you keep track of your money with this system. Even though Dave Ramsey may say that is best the option to budget, that might not be the case for everyone else. In fact, there are other ways of using the envelope system to the budget that might be better than what he recommends.
However, you can now use the envelope system for online transactions. Albeit, it’s a bit trickier. Write your budget on the envelope and don’t spend more than you budgeted. As well as, write what you’ve spent on the outside of the envelope and balance what you have left. Though, if that is not something you are up for, thanks to technology now there are apps you can use to help you with that.
What Are Alternatives to the Envelope System?
Well, the envelope system is a way to budget, so why not look into other budgeting methods to help you out. Such as using apps, excel, or paper.
Budgeting can be done in many ways. Though one new popular way of budgeting is using apps. With the latest technology, there are now apps that are meant for budgeting and help you pay off some debts as well.
Another alternative way to budget is using an excel spreadsheet. Using an excel spreadsheet as your budgeting system can be a good option for you if you like being super organized. Using excel will help you set up your income and expenses and is easier to calculate. Many like how you can see everything from off of excel of your budget and how there are multiple templates you can use for excel to budget.
Now if you prefer to still write your budget down, then using the paper method might be the right one for you. What is nice about budgeting with the paper method is how you have control over how you create the budget. You can create a budget planner and customize it to your liking. This is great for beginners who are starting to budget and find it better to use pen and paper as their way to budget.
Whatever method you use, you can keep track of your financial goals and find some level of financial contentment if you know how to maximize your budgeting efforts. Whether it’s an envelope system or other budgeting methods, make sure you’re familiar with the process involved to ensure a favorable result and reduce some financial mishaps along the way.
Does The Envelope System Really Work?
The guiding principle of the envelope system can be replicated without the need to hold physical cash. Here are some alternatives of envelope system apps that you may explore:
- The clip system: This is quite a different method from the envelope method, but it’s less chunky. Rather than use envelopes as described, you’ll use clips—which allow you to see the divided notes. It’s best to use clips of different colors for the division. And just like envelopes, when money for a category is gone, then it’s gone.
- Goodbudget: The mobile app and website allow users to track their spending by allocating funds to different categories. Goodbudget allows users to get a more intricate system for an additional fee.
In Conclusion
Dave Ramsey’s Envelope System s a very powerful weapon to tackle overspending. They’ll help you to keep track of your funds better than ever if you faithfully keep to it. Put the envelope system to work for you, and be intentional about your spending pattern. Find the perfect one for you by checking Dave Ramsey’s collection of envelope systems.