Envelope System

The Envelope System

I enjoy coming up with ideas to trick myself into saving more and getting all of the things we need and avoiding temptation. The envelope system is one we use in our household and hopefully it works as well for you as it does for us.

We used to have all extra funds put into a savings account. When we wanted or needed something that was not in the budget, we simply took it out of the savings account. Often times this led to having less in the savings than we wanted to have to make us feel secure. On the other hand, there were items we had to purchase, so I came up with the Envelope System.

Right now, a certain amount of dollars each month is transferred into the savings. This amount is no longer touched. The money will be used for retirement or in the event we lose all income sources and need to survive for several months/years.

The balance of any extra money found in the budget is now diverted into the envelope system and this is how it works. Make a list of 4 things you want or need. For example, you could have a vacation, a bike for your child, paint for your bedroom and new carpet for your living room. Notice how there is a mixture of price ranges. Now take some dollar bill size envelopes and mark them with the four things you have decided on and then make a 5th one and name it Misc.

Now you must decide which 3 of these items are of the highest priority and which 2 are of lower priority. Mark each envelope with a #1 or a #2. Then set a target amount of dollars for each item. The Misc envelope will be the amount you feel comfortable having on hand for emergency purchases. Each item listed as a #1 priority will get $10 contributions, each #2 priority will get a $5 contribution. When you find an extra $10 in your budget, the first #1 priority item gets $10 into that envelope. I keep the envelopes in order in a locked cash box to ensure that each envelope gets a contribution in the order I have set.

You are now funneling money into several projects and as the amount of money in the envelopes grow you can finally see money set aside for the things that are important to you. The last Misc envelope is for those things in life that just crop up out of the blue like a car repair or something that needs servicing.

While you are saving for all of these projects, when you come across something else you want to save up for, just put an envelope into your cash box with the #3 on it. Number three envelopes are for the future when a spot on your list becomes available.

Once you have reached the target amount in an envelope pick one of the #3 envelopes to fill that slot. If you reached a #1 target, you can even take a #2 envelope and turn it into a #1 so you can get that one quicker and have the new envelope replace the #2 instead.

You have to be patient, and learn to never take from one envelope an put it in another. The whole idea behind the envelope system is to get the things that keep getting pushed aside. If you remove money from an envelope to use for another it negates the entire purpose of the system.

I am officially addicted to the envelope system and seem to watch my money even more closely to put as much as possible in the envelopes. I get a great feeling of accomplishment when an envelope reaches its target amount and I can start shopping for it and I generally try to get it on sale and for less than the target amount. When I do get the item for less, that money is put back into the envelope system.

Another exciting part of the system is deciding which #3 envelope will go into contribution rotation because I know I will finally be getting the item. I try and keep a good mix of price ranges as well as a nice balance between wants (vacations, boats etc.) and needs (new paint, flooring etc.) The system is super easy to do and best of all, since the money is kept at home locked up, I never spend that money because it is at home when I am shopping so there is no temptations or access. In fact, at this point, I seem to forget about the money locked up until it is time to add money to it and then I get excited because I see the progress I have made toward my goals.