How The Envelope System Works

A simple question that can help a lot of people ... how does the envelope system work?

QUESTION: Lance asks Dave to explain the envelope system. Dave dives right into it.

ANSWER: There are a few things in your budget that you tend to overspend on. One of the reasons you overspend is that there’s nothing to tell you when to stop. You may write down $800 for food ($400 per 2-week period), but between the checks and checkcard purchases, you can go over the budget, because your money is going in 14 different directions.

What you do is, every 2 weeks, write a check for $400 and cash it. Put the cash in an envelope and write “food” on the envelope. Never buy anything out of that envelope except food, and no food is bought unless it is with money that comes out of the envelope. The point is that you can’t overspend what’s in the envelope. If you run out of cash, then you don’t spend any more from that category. If you get to the cash register and don’t have enough cash to cover your items, you have to take some of them back. You can use it for food, entertainment, clothing and stuff like that. If you have no money left in the food envelope, you eat leftovers.

For bills that you send through the mail, you don’t have to worry about using the envelope system.