The Envelope System Explained
Gary asks Dave to explain what the envelope system is and how it works. Dave explains in detail.
QUESTION: Gary asks Dave to explain what the envelope system is and how it works. Dave explains in detail.
ANSWER: It’s called the envelope system. I stole it from your great-grandmother and a guy named Larry Burkett who used to teach finance from a biblical perspective as well. That’s where I first heard about it, but even Larry used to say he stole it from your grandmother.
You just say with some of your items, you have the potential to bust the budget. An example is grocery shopping. Grocery shopping is a real opportunity to screw up your budget because you go in and use the debit card or write a check and you don’t know where you stand in your budget or if you went over your budget. You just buy whatever is in the buggy. When you get home, you realize you went over.
We teach you to take the amount of money for that pay period that you’re going to spend on groceries, put that amount of cash in an envelope, write “food” on the envelope, and don’t buy any food ever again except from that envelope.
We use envelopes to this day for food, entertainment and clothes. This is how the Ramseys live. But I don’t do that for my electric bill or water bill. It’s automatically drafted from my checking account. I pay doctor bills with a check through the mail. But those aren’t things that break the budget, and I can make a cool, calm decision and compare them to the budget before I pay them. I can also make some adjustments to cover them.
That’s what the envelope system is, and it works beautifully.