Dave Ramsey's Envelope System

from daveramsey.com on 05 Sep 2009

By Dave Ramsey

On a budget? Still over-spending? Trying to figure out the best way to organize your finances and spend wisely?

Get on a Simple System

I found out that Grandma's way to handle money still works. People used to always use cash envelopes to control their monthly spending, but very few do in today's card swiping culture. The envelope system is a key component of the Total Money Makeover plan because it works. Here are a few simple basics for starting a cash envelope system:

Budget each paycheck. Budget is a dirty word to most people, but you must budget down to the last dime if you're going to successfully implement the envelope system.
Divide and conquer. Of course, there will be budget items that you cannot include in your envelope system, like bills paid by check or automatic withdraw. However, you can create categories like food, gas, clothing and entertainment.
Fill 'er Up. After you've categorized your cash expenses, fill each envelope with the money allotted for it in your budget. For example, if you allow $100 for clothing, put $100 in cash in your clothing envelope for the month.
When it's gone, it's gone. Once you've spent all the money in a given envelope, you're done spending for that category. If you go on a shopping spree and spend the $100 in your clothing envelope, you can't spend any more on clothes until you budget for that category again. That means no visits to the ATM to withdraw more money!
Don't be tempted. While debit cards can't get you directly into debt, if used carelessly, they can cause you to over-spend. There's something psychological about spending cash that hurts more than swiping a piece of plastic. If spending cash whenever possible can become a habit, you'll be less likely to over-spend or buy on impulse.
Give it time. It will take a few months to perfect your envelope system. Don't give up after a month or two if it's not clicking. You'll get the hang of it and see how beneficial the envelope system is as you dump debt, build wealth, and achieve financial peace! See ... simple!

Certainly, some bills may come in at different times of the month, so you'll need to adjust your written game plan to take it one step further. You need to plan the budget based upon your pay periods.

Say that you get paid twice a month. If you can write down which bills you plan on paying from each paycheck, you will not be left with a surprise bill. Spend each month's income and each individual paycheck on paper before it comes in.

Have Some Fun

I also have no problem with you adding an envelope with money just to have fun with! As long as you and your spouse have agreed on it, you are fine. There should be no lying. Agree on your budget, agree on your fun money, and be open. Fun money can be anything you want it to be. There are no rules on that envelope, unlike money in the "entertainment" envelope that is used specifically for entertainment.

What people are saying about the envelope system:

I have noticed that since I've started using the envelope system, I'm spending about $60 less per two-week period than when I used a debit card. I think it's because when I lay three $20s down for groceries, it hurts! When I paid with debit, it didn't really register with me. —My Total Money Makeover member mgtyjoe

I finally know where every dollar goes, and I love it. —My Total Money Makeover member rb4580

Get on a plan and organize your cash with Dave's Deluxe Envelope System.

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Post a Comment

We just started a much more disciplined approach to our budget. In reading other comments/questions about how to handle varying incomes, expenses that don't occur monthly, and which categories earn the "envelope" treatment, I would highly encourage all to purchase Dave Ramsey's book, The Total Money Makeover. All of these concerns are addressed and he provides example budgeting sheets. Well worth it!
Melissa February 13 2010 8:15 AM

The way that I have it set up is this. Things that I would purchase monthly or weekly, groceries, gas, haircuts, prescriptions, etc. are put in cash envelopes. I have a seperate checking account for bills that come up every few months, car registration, trash removal, utilities, etc. I also add an extra $25.00 every pay to that account incase of an unexpected Dr appt. I do grocery shopping and get gas once a week and once the cash is gone it's gone. Mine is still a work in progress but feels so good to see where the money is going and I can show hubby how much things really are.
Stephanie February 07 2010 7:43 PM

I really want to try the envelope system, I think it would help save me from spending money so freely. But my husband and I do not have a set income every week. Any advice?
Danielle February 07 2010 6:44 PM

My husband & I are really struggling with staying on budget. We would love to try the Envelope System, but are not sure where to start. What catergories are used? What about items that do not occur on a daily or weekly basis? Haircuts? Nail Salons? Any advice would be helpful.
kristi January 27 2010 10:37 PM

How do I budget for bills that are due on the 1st of the month and which are paid from funds received the prior month? Which month should the bill/money go to?
Caroline January 25 2010 4:40 PM

Tammy, no I do not carry the envelopes with me. I have a lock box at home (you can find lock boxes at any walmart or office supply store) where I keep the cash in. I only take the cash that I need for that day and no more. Such as gas money and lunch money. The rest I do not touch (bills etc). Whatever cash I do not use I put it in a real bank and I do not take my atm debit card with me. The money that is in the bank there is no need to touch that money. Once I am fully deciplined at controlling my spending then I will move on to another system. I just need some type of money management system now. Hope this helps.
James W January 20 2010 5:28 PM

do you actually carry all the envelopes filled with cash with you? my husband doesn't like the idea of carrying that much cash with me, but confused on how to spend the money if it's not with me. i have no credit card or check card with me anymore.
TAmmy January 19 2010 7:34 PM

I just started the envelope system. A friend told me about it years ago. I just started a new job and I am catching up on some bills. So I have been short from pay period to pay period. Its been tough. So I decided to try the envelope system. And I tried it first with my fuel expense from pay to pay (for me it was every other week or 10 days) I labled ten envelopes...day 1...2...3 etc. and it worked like a charm. So needless to say my trial run worked out well. I finally found a system that worked for me. Dont give up. Dont let anything or anyone keep you from financial freedom. even if you have to resort to "old fashioned" practices. in the end your not stressing about money and thats worth it. Any questions you can email me at jameswhiteiv@gmail.com Good Luck.
James W January 19 2010 6:51 PM

I'm very interested in trying this system out. My husband is not so trilled about the idea. Any advice on how to use it as a couple?
Sequoya January 19 2010 3:50 PM

I am new to DR. A coworker was talking about it a few weeks ago and I was interested in the budgeting. My husband and I only get paid once a month, both on the same day. How do you suggest we set up our system as well as how do you plan for unexpected bills for example I received a medical bill last week that was back from this past June, they finally billed me once all the insurance payments came through? I'd appreciate any suggestions! Thank you :)
Lynn January 18 2010 12:18 AM

I understand the main concept,using cash,and budgeting money away in envelopes.We have been doing this for a while, with grocery, gas & entertainment,what I don't see is how to do this with items that only come up occassionaly. Like hair cuts,school fees,auto tags,the little holidays(valentines day).How do I account monthly for items that may only come up once a year.How do others do this.
Frank January 14 2010 11:45 PM

You can really have envelopes for any category that you want to set yourself a budget on. We even have one for Wally-world since they seemed to get a chunk of our $$ when we went there. We have Groceries, Eating out, Wallyworld, Clothing, Household stuff, Costco.
Bob January 13 2010 5:08 PM

I am also new to DR. I am confused about which catergorys should be use with the envelope system. Is it for all expenses or just food, gas, clothing and entertainment? Any ideas would be helpful. Thanks.
sterk January 09 2010 7:49 PM

I'm new to DR's envelope system (although I have tried similar systems in past)and I have found it to be great! My advice to those just beginning or thinking about trying the system is be patient! At first it does take some time and patience to make it work. Just as the "megamart purchases" require some reconciling and paperwork it is worth it to know you haven't overspent!! The first few months are "labor intensive" while you get your system down and figure out how to handle all the individual categories of spending! I use the cash envelopes and also some small free bank accounts that I can transfer "to and from" as expenses occur. I love the comments and advice of others. Keep it up! Thanks.
Juni Davis January 07 2010 12:15 PM

We started using the envelope system about 6 months ago and have been shocked by how much money we have saved!! My husband bought a mini penaflex and labeled each section with the different categories. The only problem is that you often have to get out the cash and your wallet b/c the wallet has your coins and your store cards you use to get the sales. You can actually buy wallets on-line that are designed with this in mind. Since I have saved so much money, that it my next purchase!
Anna January 07 2010 11:24 AM

I actually decided to pre-pay all of my utilities last year for 12 months using my tax refund. Now, I dont have to worry about paying utility bills each month. I still open the bills to make sure I have a credit balance with them, but its great knowing I dont have to come up with $250-300 each month to pay for them. The way I looked at it was the tax refund really is money I didnt have anyhow, so I wont miss the money sent to the utility companies. You have to pay them anyhow, why not take that burden off your shoulders for 12 months. I LOVE IT folks.
Bob January 06 2010 8:09 PM

the way i handle monthly expenses or even quartely and yearly expenses is to divide the total monthly expenses by 4 weeks and deposit that amount in the "bills" envelope and have a separate envelope for quartely or yearly payments and divide accordingly so that you have the money available when the bill is due. I do also have the standard groceries, restaurant, etc envelopes that i budget for weekly with what is left after bills and savings are allocated. In answer to the above question about the megamart issue..i would pay for everything from one envelope (whichever i spent the most from) and then reconcile when i get home by replacing the money from each appropiate category back to one i spent from but i feel that it depends on the person and if they can handle having to reconcile. It is a job to do but it is possible. Otherwise you may just have to divide everything up at the register and pay for each category separately to help keep your sanity about the whole thing. I feel it is important to stick to the plan no matter what steps you need to take to make it happen.
tracy January 06 2010 8:42 AM

The cash system works because you can see it. When it is gone, then you can't spend or overspend in the wrong category. Everyones life is different so no one system works for everyone. Review your budget to see where you are overspending and what things blow your budget. For me it was dining out, weekend spending, and quarterly type expenses. Now I give myself an envelope for lunch, wkend 1 and wkend 2, and I save for quarterly type expenses so that a lump sum does not blow my budget. It helps with cash flow.
pam January 05 2010 2:22 PM

there is easier ways of implementing the envelope system than doing it physically: use a free (or cheap) software. you can find many offers out there in the web using the envelpe method. the great thing with these softwares is, you can still use debit and credit cards and yet it's easy to stick to your budgeted envelopes. just do a google search with "envelope budget" or similar.
bruno December 20 2009 10:47 PM

OK...I have a question about this. How do you handle a trip to a "mega" mart with the envelope system? For example my trip today, I purchased a gift for my mom for Christmas that I will be reimbursed for from my dad, clothes for my daughter, medicine and food. Do I do separate orders for each category? Attempt to reconcile it once I get home or what? thanks!
Lori December 13 2009 9:19 PM

I love the idea about the binder/clear pencil bags. I'll buy mine tomorrow! Thanks.
Susan December 11 2009 2:04 PM

I don't like the idea of having cash in the house so I opened up 8 free checking accounts minus the checks. I named each account and have automatic withdrawals from certain ones and transer money to the main account and write a check on the others. The bank accounts are really the envelopes.
Scott December 10 2009 9:09 AM

Instead of using paper envelopes, I keep a binder with clear pencil bags. The pencil bags are sturdy and I can write the category and amount on the bag with a permanent pen. I also keep a copy of my budget, grocery lists, and chore list in this binder. It works!
Janice November 08 2009 7:57 AM