 The modern envelope system
“We always knew the light blue envelope was for treating the grandchildren!” That’s the memory one of our employees had of grandparents who used the envelope system to budget their money. While different-colored envelopes for different expense categories may have been an easy way to control expenses back then, there is now an even easier – and much more secure – way to divvy up your income.
The goal of the envelope system is to avoid overspending in any one category of your budget, but particularly for discretionary expenses like entertainment, dining out, or gifts. The “envelope” name derived from the fact that in the past people often divided their inflow of cash into separate envelopes labeled – and sometimes color-coded – by category of expense. For example, one envelope would be just for the month’s entertainment expenses. Cash would then be put into envelopes to later be withdrawn as needed to meet expenses. Only the amount in the envelope could be spent and any left-over amount at the end of the month was put into savings.
This type of approach can work wonders if you are the kind of person who tends to “use up” your available funds or if you use available credit for unnecessary purchases that haunt you later. If you respond well to limits and structure, knowing that you have a finite amount of cash could really help you take strides toward putting your money to work on your goals in life.
It’s not necessarily a great idea to leave large amounts of cash lying around the house in envelopes, so the better option these days is to use multiple checking accounts and at least one savings account.
Here’s how to make it work:
- Start with a budget to make sure you have a grasp what limits to set in each category.
- Confirm with your financial institution that they allow multiple checking accounts for one person or a couple and don’t charge any extra fees for this.
- Confirm with your HR department that they allow a deposit of your check into multiple checking/savings accounts.
- Name your multiple accounts after the categories they will be used for.
- Make sure to label your separate debit cards or checkbooks too.
- Opt out of overdraft protection on the separate checking accounts since having it would defeat the purpose of having a limit on the money you can spend in a category.
- Put in the maximum amount for bills that may vary – like heat or electricity – to make sure you are covered for the higher months. You can always transfer unused money into savings later.
- Leave a little extra in each account in case of errors in calculation.
- It’s probably best to use credit cards only for emergencies if you are using the envelope system, since using credit for extra expenses again defeats the purpose of using the system.
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