Personal Finance 

BVC #16: Introduction to Envelope Budgeting [VIDEO]

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Here’s a little video discussing the ins and outs of envelope budgeting, how it’s done (at a basic level), why you might want to consider it, and my thoughts on its effectiveness. I’m by no means an expert on envelope budgeting, but I do understand the basics, so I invite those of you who do use this on a regular basis to chime in with your thoughts!

{ 16 comments, please add your thoughts now! }

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16 Responses to “BVC #16: Introduction to Envelope Budgeting [VIDEO]”

  1. Hi Jim–Brilliant concept. My Grandmother used the envelope method all her life (91 years). Never had a bank account or a credit card. As you said it isn’t without it’s flaws, but here are some things she never had to worry about:

    1) Carrying debt
    2) Paying interest and late fees
    3) Identity theft
    4) Worrying about her bank closing
    5) Not being able to get to the bank
    6) Having her accounts suspended, frozen, seized or attached (though that was never an issue)
    7) Having her credit or bank cards lost or stolen
    8) Leaving a paper trail of her purchases, habits and activities
    9) Not having money in a pinch
    10) Concerns about the state of her credit report, it was completely meaningless in her life.

    And yes, she had an envelope for savings that got steadily fatter over the years. Her orientation toward thrift was so great that she didn’t even buy the envelopes she used. They were mostly return envelopes from junk mail she received.

    It would be a major dissadvantage if you need to buy gas at a self service station, to say nothing about the hassles of buying an airline ticket or anything over the web, but the visual power of those envelopes and what they represented was hard to ignore. She understood money in a way we can’t in a world of largely electronic transfers.

    Oh, and I almost forgot, she always owned a house, but never had a mortgage.

  2. jillianlou says:

    What do people do to buy airline tickets or other big cash purchases? Save the cash until they get the amount, then deposit it and use a card? Just use the cash (like at the airport, etc)? I would be afraid to lose all that money…I have a bad habit of leaving my purse open!

  3. mikecancook says:

    Great video! Nice to see variation in scenery. Envelop budgeting seems like a clean and simple alternative to cash expenditure. I may try this just for my shopping/spending budget.

  4. Dee says:

    I just happened to stumble upon this website and couldn’t believe you were talking about envelope budgeting. I’m actually starting it tomorrow with my next paycheck. Since I am a teacher, maintaining a budget in the summer is crucial. I’m using it mostly for shopping/spending budget and I can’t wait to see how it goes!

  5. Miss M says:

    This is a very old concept. 49 years ago my Mom handed me a cardboard style book filled with about 15 envelopes. I named each envelope and selected an amount to be put in each week as the paycheck arrived. To cut to the chase… was the best of all ideas to create the habit of budgeting within your means. I highly recommend it, especially to someone just starting out with the idea. By the way, I always had money for everything with this method and never purchased anything unless the money was in the evelope. Thanks for all that you do with your bulletins. I read them all.

    • matt says:

      mymom did this too for over 40yrs…..always works….didnt need a seperate budget for each paycheck, as you have the same budgeted amount come out of each check….makes more sense than trying to pay a mortgage all from 1 payday.

  6. Damon Day says:

    I advise many of my clients who have trouble with budgeting to use this system. It works very well for many people because of the physical presence of the money.

    Of course the main drawback is that you always have to pay with cash (which is sort of the point) but for certain things it is hard to give up the convenience of having a debit card.

    What some of my clients do is actually keep some money in their checking accounts and make up a coupon for that money that they put in whatever envelope or envelopes that it should be in.

    So for instance if they budget $300 for gas but they like the convenience of paying at the pump, then they put a $300 voucher (or multiples in like $50 dollar increments or so) into their gas budget envelope. Then if they use the debit card to fill up the tank, they remove a voucher or combination of vouchers equal to what they spent at the pump.

    This allows you to get the benefits of the envelope system to help stick to a budget but not have to go 100% cash.

    Or a simpler variation of this like Jim mentioned in the video is to use one credit card and have an envelope for it. Then at the end of the day you have to transfer whatever cash that you spend on the card into the Credit Card envelope so you can pay that bill at the end of the money.

    For people that don’t have access to a credit card, the debit card system involves an extra step of creating the coupons, but once they are created, you can reuse them month after month.

  7. janessak says:

    Thanks for info. I have tried the envelope method without any guidance and found it to be great.

    I tend to lose papers easily and so I opted for an expanding file that is coupon sized. It works great and you can label the tabs. The only draw back is that you either have to take the whole thing with you or plan a head and take the money out that you will need.

    With some of your pointers I am going to fine tune my envelope system.

    Thanks again.

  8. Guy in San Antonio says:

    I think the idea of having an envelope for the credit card is an excellent idea!

    Also, in order to keep things simple, i would suggest you don’t use the envelope system for fixed expenses you know about like your rent or mortage. It should be kept to your top 2 or 3 flexible expense categories like: groceries, entertainment, vacations. By doing so, i think you can gain more cooperation from a recalcitrant spouse.

    Guy Hamilton
    CPA and recovering debt junkie

  9. I am not good with cash, enveloped or not. I am just too paranoid of getting robbed or losing it somehow. I am just fine with my debit, credit cards and some good Excel spreadsheets. I do keep a little “coffee cash” and emergency money (like in case I need to catch a quick cab), but its never that much.

  10. becky says:

    Excellent and simple, I use the envelope system, but I think it’s important to tell people to put money in a 403b or 401k or IRA account first, “using Direct Deposit” then with your remaining paycheck us the envelope system.

  11. FlyFisher says:

    Great insight which gives a good perspective on the importance of budgeting. I think I will try envelope budgeting for a while. When your money is all lumped together it can be easy to spend it in needless places. However, sometimes not having a budget for something non-essential allows you to “forget” about it and save some money.

  12. ellington1 says:

    i love your idea of an envelop budget it will work if you have the willpower to carry it out each month and once you spend the envelop its gone for that month so spend spareingly I love your idea of a credit card envelop keeps track of your credit card.

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