This Isn't Grandma's Envelope Budgeting System

There is probably a good chance that your Grandma, like mine, employed the tried and true envelope budgeting system to handle the family spending and income "in the day". But the question is, will this budgeting system still work today?

After all, it wasn't too long ago that most people didn't even have things like credit cards, bank overdrafts and access to the dreaded payday loan. And although these modern conveniences seem "handy" today, it is this easy access to credit that has steered people away from budgeting, when in fact, it is more important than ever to track your income and expenses.

Think about it, when the money came in to Grandma and Grandpa's house, that was probably all they had to spend until the next payday. They didn't have the "luxury" (lucky for them) of charging things on one of their many credit cards if they ran out of cash. They didn't have a bank overdraft and they certainly weren't offered easy credit and "don't pay for 12 months" purchasing plans. And if they ran out of cash, they probably didn't eat. If we run out of cash, it goes on the credit card, which of course we swear to ourselves we will pay off "next month".

But alas, many times we don't. The credit card debt snowball starts small for most of us and before long it is rolling out of control.

So the question remains... will an envelope budget still work to get us out of debt and keep us out of debt in today's complicated financial world?


What Is Envelope Budgeting?

If you are unfamiliar with envelope budgeting and how it works, here is a quick primer on how our grandparents did it, after which I will show you how it can be "modernized" for today's complicated world.

Envelope Budgeting 101

Pull out a pad of paper and a pen, and then start to write down every expense and bill that you can think of that you pay throughout the year. Mortgage/rent, groceries, car insurance, birthday gifts, gas, car loan, cell phone, entertainment, travel, existing credit card debt payments etc. (And probably one more "etc." for most of us.) This exercise alone will probably be a real eye opener to just how many different places your money goes each month.

Now, write down any regular investments that you make, such as to a retirement fund, saving for a down payment on a house, or your children's college fund.

Once you have your complete list, count up how many "categories" you have. For example, your car insurance would be one category. Then, grab enough envelopes so that there is one per category. Going down the list, write the name of each category on the outside of an envelope.


How often do you get paid? Most people, I think it is safe to assume, get paid every two weeks so I will use this time frame for this explanation of envelope budgeting.

Your job now is to figure out how much you spend every two weeks on each "category". For some of your expenses that remain constant from month to month, this won't be too hard. For others, like entertainment, you will have to "guesstimate" what you spend or, more appropriately, what you can afford to spend. Once you have figured this out for each category, write the amount on the outside of the corresponding envelope.

Let's say you now have 15 envelopes in front of you with category names and how much you spend on that category every two weeks. Go ahead and add up all those figures, and then compare the total to the total take home pay that you receive every two weeks. Depending on how the two figures compare, you may have to do some "reworking" of your spending. Obviously if you find that you are spending more every two weeks than you are bringing home, you are probably, well not "probably", you "are" going into debt.

And if you are bringing home more than you are spending... congratulations, you are on track!

Now, the next time you get paid, here is what you are going to do. I want you to actually "cash" your paycheck. That's right. Get the actual cash (in smaller bills so it is easy to divide up) in your hand. Then, "pay" each of your envelopes, putting an amount of cash in each one that corresponds to the amount written on the front of the envelope. When the time comes to pay your rent for example, you go to your envelopes, pull out the rent envelope, and use the cash inside to pay the rent. Going to the movies Friday night? Just go to the "entertainment" envelope, grab some cash and you are on your way. What's that? No cash left in the "entertainment" envelope? Guess what. You have already spent your entertainment budget for this two week period. Looks like you will have to find a good movie on TV if you want to stay within your budget.

Do You Have To Use "Real" Cash With Envelope Budgeting?

Yes and no.

When you are first starting out with this system of budgeting (or any system for that matter) getting in the habit of paying for things with cash is, well, a great habit to get into. You might think a little bit harder about "needing" those new $250 pair of shoes if you have to physically count out 25, $10 bills rather than just swiping the plastic. Paying with cash seems to "hurt" a bit more and makes things a "bit more real". So yes, when you are first starting out with your envelope budget, try and pay for as many things as possible with cash. If you need to pay for something by check (don't ever send cash in the mail obviously), go to the bank, put the cash in your checking account and then write the check to pay for it.

What's that? Seems like too much work? Believe me, this is a great way to curb your spending and get your budget on track. Try it this way for at least three months.

Bringing Envelope Budgeting Into The 21st Century

OK, I'll admit that in today's "cashless society", paying for everything with cash is difficult, and in some cases next to impossible. Enter Mvelopes, the 21st century answer to envelope budgeting. Mvelopes does what I described above, but completely online. It's based on the same principles of proactive family/personal budgeting that the physical envelope system is. But, it ties in the modern convenience of online bill paying, mobile access (check what's in your "clothing" envelope on your cell phone before you buy those shoes), online banking and net worth tracking. And it is all done online, so you can access it from anywhere in the world through the internet.