The envelope system, Dave Ramsey-style, is a tool for tracking how much money you have in each category of your monthly budget. It happens by keeping cash inserted in envelopes and arranging them in categories. You can easily count how much money you have left at the end of the month by looking into envelopes. Isn’t that very simple?
Dave Ramsey designed this to simplify budgeting and help you manage your money to prevent fiscal issues. Our grandmothers used the same method to manage household budgets using envelopes! Though most of you might not have heard of it, here is all you need to know about the envelope system Dave Ramsey touts.
How Does the Envelope System by Dave Ramsey Work?
You divide your money according to how much you will spend on a specific category in a month. Each amount of cash will go into a separate envelope and be labeled; for example, an envelope for groceries may be labeled as “Groceries.” Now, whenever you need to buy groceries, you will take money from a specific envelope.
For example, let’s assume you have a total monthly budget of $4000. You allocate money for each category and put it in a specific envelope accordingly. So, if you have a budget of $500 for groceries and $300 for gas expenses, you will put them in respective envelopes and use them when you need groceries or gas.
In this way, you will only spend money from the titled envelope for specific expenditures. Basically, this system helps you from overspending and keeping your spendings within budget limits. This system can be divided into four steps.
Step 1: Divide Your Expenses into Categories
This system of budgeting is based on dividing your income into different categories according to your expenses. These categories can be:
- Household bills
- Gas expenses
- Dining out
- Children’s items
- Pet care and others
Design your categories of expenses according to current situations. Try to make as many small categories as possible but still keep it within limits to avoid getting confused. Some people forget about adding irregular expenses in budgeting categories. These include insurance, taxes, gifts, or savings for a special event.
If you are confused about allocating expenses into different categories, you can look into your bank statement for the previous month. It will help you know where you spend your money mostly. It will help you get more organized.
Step 2: Label Each Envelope
You will be using one envelope per category of spending. Label all the envelopes so you would not mix them up. You must mention the amount of money for each category under its name on the envelope. It will help you track the amount of money you have taken from a specific envelope and how much is left in it.
Step 3: Allocate a Specific Amount for Each Category
Now is the time to divide your monthly income into small amounts according to the expenses for all the categories. Taking the same above example, you earn $4000 as a monthly salary. For each category, you will take money from this amount and put it in the respective envelopes.
- $500 for groceries
- $500 for bills
- $300 for gas expenses
- $200 for health
And it is similarly dividing your complete budget into categories such as these. It will make an organized and perfect budgeting system for your whole month. If you want to go grocery shopping, take the required money from the grocery envelope or take the envelope with you. It will keep you within the limits of spending and not disturb your budget.
Step 4: Spend From the Related Envelope for a Specific Category
This envelope system Dave Ramsey advocates is just like dieting, and it isn’t easy to stick to it. You sometimes run out of money from an envelope, and you want to borrow from the others. But with practice and patience, you can learn to stay within limits of spending for each category and not overspend.
At the end of the month, you will see that you might have left with some money in one or more envelopes. You can either leave it in that envelope for the following month’s expenses or shift it to the savings envelope.
Budgeting is an excellent way to keep your expenditures on track and keep you from running out of money. But this will not remain the same every month.
What If an Envelope Runs Out of Money?
You have to be careful while taking money from an envelope and prevent yourself from running out of money for any category. You must not borrow money from other envelopes, as this will disturb the whole budgeting system.
For example, if you have spent all the money from the dining-out envelope, don’t be persuaded by taking money from other envelopes for this purpose. Keep in mind that the fundamental goal of this envelope system by Dave Ramsey is to control your expenses and stay within the limits of your budget.
What If you Have to Spend Some Money on Online Shopping?
This envelope system only works for expenses that you are going to do physically, like going to a grocery store, getting a haircut, or having lunch with family. An envelope system is best for this type of expense. But what if you have to shop online?
You can also manage this by the Envelope System. You can do online shopping and work with the envelope system, but it becomes slightly thick. Note the amount you spent on online shopping on the envelope related to the shopping category that you have done online. In this way, you can keep proper track of online shopping and still manage the budgeting envelope system.
Advantages of the Envelope System
This system has been in use by people for a long time now, and it provides people with so many benefits. Some of them are:
- It keeps your budget on track
- It teaches you discipline and management
- You develop a sense of accountability in yourself as you are the only person responsible for this system
- It helps you avoid overspending, and it is not easy to overspend if you thoroughly follow this system.
There are quite a few useful techniques and strategies you can learn from the envelope system. The financial expert, businessman, and successful author offers a lot of insights that could help you progress and experience financial growth as well.