How the Envelope System Can Help You Manage Your Money

Crystal Hunt
Wellthy Living
Published in
3 min readJan 3, 2017
image licensed from Shutterstock

The single most interesting experiment in money management that I’ve ever been a part of was when my husband and I gave ourselves a year to get out of debt after investing an inordinate amount of money in our publishing company. That’s a story for another day, but the basic lesson of the story is a recognition that publishing children’s books (while immensely satisfying) was not a direct path to a life of leisure and riches. In fact, quite the opposite.

Thus, enter the envelope system of managing money. I first heard about it from my aunt, who had heard about it from somewhere else. But she had found it extremely helpful and I thought it was worth a try.

Here’s how it works.

STEP 1:

You do up a budget, based on how much money is actually coming in and what all your non-negotiable expenses are (rent, insurance, car payment, child support — whatever). You set up all those expenses to autopay directly from your bank account.

STEP 2:

You figure out what categories are left for “discretionary spending” (ie groceries, entertainment, clothing, travel, savings etc. and then divide up the amount as necessary starting with the most essential first.

For example: Let’s say your take home pay is $3000 per month. Your non-negotiable expenses are $2000 per month, leaving $1000 per month as discretionary spending. You might decide to break that up like so:

Groceries/Food: $600/month

Clothing/Entertainment: $200/month (this to be shared with your spouse, so $100 for things you do together, and $50 for each of you on your own)

Debt Repayment: $200/month

STEP 3:

Set up an auto transfer of that debt repayment amount, whether it’s to a credit card or mortgage or whatever. You’ll always start with the highest interest debt first!

STEP 4:

Now make an envelope for each of your discretionary categories. In our house, we had 5 envelopes with different colours: Food/Groceries, Family Entertainment, Jared’s Fun Money, Crystal’s Fun Money, Credit Card. Write the amount each envelope gets on the front of it.

STEP 5:

On each payday or at the start of each month (Whatever works for you) you go to the bank and withdraw enough cash to fill all the envelopes with the amounts on the front. And then you pay for everything in cash. The only exception? If you order something online which you need to put on a credit card, then you immediately take the cash from the appropriate envelope and add it to the CREDIT CARD envelope. That way when it comes time to pay the credit card bill, that money can be applied to the balance to keep you moving in the right direction.

I also recommend for those first couple of months putting the receipts from everything you bought back into the envelopes so you start to get an accurate picture of what you’re actually spending your money on. It’s interesting — and will often surprise you as you don’t realize how expensive some habitual purchases can become.

As your income goes up, the trick is to try to stick as close to your original envelope amounts as you can and apply the whole balance to the debt so that you are paying it down quicker. Every six months, or annually, reassess your situation and do up a new budget / adjust your envelope amounts as required.

The biggest difference? Seeing your actual cash dwindle has a much more powerful effect on curbing spending than the invisible backwards movement that happens when you pay with debit or credit. It’s amazing what you decide you don’t need or want when it requires putting actual cash on the table.

Give it a try — I’d be curious to hear how it works for you!

xo Crystal

Originally published at wellthyliving.ca on January 3, 2017.

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Crystal Hunt
Wellthy Living

Writer, creative mastermind, health psychologist, productivity geek, and strategic authorpreneur—sharing what I learn on my way to a million published words.