The Envelope System: Pros and Cons

The General Concept
Envelope systems are often endorsed by get-out-of-debt gurus, and are a fairly simple method of controlling spending. At the start of the month or week, you withdraw the amount of cash you’ve budgeted for expenses you pay at the vendor (not things like rent, electric, heating gas, or other bills you pay by check). You divide the cash into envelopes for the various categories; mine are food, general upkeep, gardening, and allowance. When you purchase something, cash comes from the envelope of that category to pay for the items. When the cash in the envelope runs out, you can’t purchase any more of that category and make do with what you have.

The Pros

• You have an easy, visible tally in your envelope for how well you’re adhering to your budget in each category.

• It’s easier to decide not to purchase something when you see an empty envelope at the store than it is to visualize your zero balance for that category when you are paying by check, check card, or credit card.

• You don’t have to record and calculate every expense in a timely fashion to see that you’re running low on funds for a category, i.e. there’s no lag between purchase and deducting funds from a category in your envelope-based tally system.

The Cons

• You really need to divide the funds in increments of $20 if you use an ATM for withdrawals, which many people need to do because of the difficulty in getting to a bank during business hours.

• The envelope system causes some difficulty when you want / need to reallocate funds for a cycle. Diligence is required to update your budget accounting every time you move money from one envelope to another.

• Purchasing items from multiple categories in one shopping trip gets confusing quickly. For example, you buy $4 worth of toilet paper at the grocery store along with $36 of food. You have only $20 bills in your food and your upkeep envelopes. Do you separate the purchases so you can get the separate change from the clerk? Do you ask her to break a $20 bill along with your purchase? Do you just make a note on the envelope that you can steal $4 from the upkeep envelope later for food? You see what I’m getting at here.

• If you are trying to keep your envelopes balanced with a separate spreadsheet of expenses to make an even deeper analysis of your spending habits, you can find yourself in an interesting situation where the spreadsheets and the money do not line up. This can be because you find a $5 bill on the ground or because you forget to enter the amount you paid at the farmer’s market on cucumbers while you still remember.

Tips on making the envelope system work:

• Withdraw funds weekly. This helps to prevent the unpleasant situation of having an empty upkeep envelope when you’re out of toilet paper in the third week (or something similar).

• Withdraw funds weekly, and allocate in $20 increments into your envelopes in alignment with your budget. This may mean that on week 1 you withdraw $160, put $100 into the food envelope, $20 into your upkeep envelope, $20 into your garden envelope, and $20 into wallet for allowance. Then week 2 you withdraw $100, put the entire $100 into your food envelope. Week 3 you withdraw $140, and put $100 into food, $20 into allowance, and $20 into upkeep. Even if this gets a little confusing, it’s much less so than trying to remember to move $10 from upkeep to food once you break the $20 bill. You do the calculations at the beginning of the month, write them on your envelopes, and stick to them.

• Separate and plan your shopping trips. My example: Before going to Walmart, I decide that I’m going to purchase a coke as a treat from my allowance, eggs, milk, and coffee, from the food envelope, toilet paper and saran wrap from the upkeep envelope, and borax to mix with sugar to kill the ants that are eating my sweet corn from the garden envelope. When I get there, I pull out the garden envelope first, leave the rest in the glove box, buy the borax, put it in the car, and trade the garden envelope for the upkeep envelope. Then I repeat with the food and the coke. This makes for a long shopping trip, but it’s much easier mentally than sitting down after the shopping trip, going through the receipt and trying to figure out how to make change into 4 different envelopes, especially when there’s only $20 bills left over.

• Never, ever, buy anything when your defenses are down. This can mean overly hungry, tired, stressed, whatever. Sticking to the envelope system requires a certain amount of mental energy, and if you don’t have the mental energy to spare you’ll probably find yourself saying, “I can get all the items from all the multiple categories in one trip, I’ll figure it out later.” But later, you’ll pay the price with the big headache of going through receipts (part of which you’ll have lost because you were overly hungry, tired, stressed, whatever) and trying to figure out how your upkeep envelope is empty when you’re positive all you bought that month was soap, saran wrap, and toilet paper.

Conclusions:
In my situation, it makes more sense for me to switch back to check card and the “virtual envelope system” for all items in the budget I am responsible for besides allowance. I use Excel daily anyway, so daily maintenance of the finance spreadsheet is not a big deal, and I have a little pocket where I can keep receipts and enter the amounts from them in the same binder that stores my shopping lists. I also tend to purchase items from multiple categories in one trip, which, as outlined above, creates headaches in the cash envelope system, but does not create extra work in the “virtual envelope system.” Perhaps in my next post I will provide detailed instructions for setting up a “virtual envelope system” using Excel, since I am now the master!