The Envelope System for Managing Money

>> Tuesday, September 1, 2009

When my husband and I got married, we were both still in college. He had a job in the computer lab on campus, and I arranged my schedule so I could go to school two days a week and substitute teach on the other three. We were struggling newlyweds, and I spent many stressful evenings trying to figure out how to make the numbers work. When I think back on those days, I'm amazed that we always (if barely) managed to get by.

Back then, the envelope system was one of the methods we used to keep our meager earnings in check. We estimated how much we would need for groceries, gas, and miscellaneous expenses, and we withdrew that amount in cash from the bank every month. The cash was divided up into envelopes - one for each category. When we needed to make a purchase, we would grab the appropriate envelope before heading to the store.

The point of the envelope system was to keep us from going over budget. We always paid in cash, and when we ran out of money, well, that was it. No more money.

Sounds like a smart idea, right? So why did we give it up?

After awhile, when money was a little less tight, it started to seem like we were actually losing money by paying in cash. Back then (though that seems like such a silly phrase since it was only seven years ago), using a debit card was less common. A lot of places - especially fast food restaurants - didn't take them. And many places would only take cash or checks.

So if I only had my debit card, I couldn't spontaneously decide to swing through the drive-thru on the way home from work. But if I happened to be carrying an envelope full of cash...pretty soon the envelope would be a little lighter and I'd have a tummy full of french fries. (This behavior was especially common when I was pregnant with First Son.)

There was also the change issue. I've never been good about holding on to small bills or coins. Every quarter I would get in change was like an excuse to buy a Coke. And if I had a twenty and the total came to $19.25, you can bet I'd be tossing a candy bar onto that conveyor belt, just to round out the bill.

So the envelope system seemed to have some downsides, but lately, paying with a debit card doesn't look any better.
I can't think of a single place that doesn't take debit/credit, so walking around with a debit card in my purse is like an invitation to start spending money.

I don't think there's really a point to this post except to say that I'm still trying to figure it out. We've been experimenting the past couple months with moving back to the envelope system, and I'm not sure yet how well I like it. It's kind of scary - I'm constantly paranoid that I won't have enough cash to pay the grocery bill. And now that I have kids, it's not like I can say, "We're running low on cash so we'll just eat ramen the rest of the month." Cash also makes it difficult to stock up on sales.

On the other hand, I'm much more aware of how much I'm spending. When I was paying with my debit card, it was always a bit of a guessing game.

Do any of you use the envelope system? Or pay for most things in cash? What do you think?

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This post was included in the Festival of Frugality at The Centsible Life.

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Eco Yogini September 2, 2009 at 2:14 PM  

wow- the envelope system actually sounds kinda neat. I'm thinking about opening a joint account for shared stuff and putting only so much in there. like an envelope, but with debit.
I've heard of people having all their money in a savings account that was not accessible via debit, and giving themselves 'allowences' in their chequing. Actually, I have the set up for that, and I put my money I want saved for the wedding in my savings account...

but I haven't been allocating so much a week for extras... adn I should cuz we just bought pizza last night... delivery. and i gasped when Andrew gave me 5$ back from my 40$... BOO.

Erin aka Conscious Shopper September 2, 2009 at 8:32 PM  

@Eco Yogini - You're brilliant! That system seems like the perfect solution. I'm embarrassed that I didn't think to do that myself.

Steph @ Greening Families September 10, 2009 at 9:29 AM  

Check with your bank to make sure that they don't allow customers to overspend with debit cards. A recent article in the New York Times Overspending on Debit Cards Is a Boon for Banks discussed this issue.

Viagra no prescription July 22, 2011 at 9:25 AM  

There was a time when the envelope system of budgeting was used in many American households. This system was a very effective way of managing the household budget and helped people avoid debt or overspending.

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