That old adage “out of sight, out of mind” has caused the downfall of many a well-intentioned budgeter. Too often money in and out of your account becomes abstract since it’s all done electronically. We’re here to offer up an old-school solution that will give visibility to your money in a way that’s as real as real can get: the tried-and-true envelope system.
There are four steps to this cash-based money management system. (While the process described below relies on physical envelopes and cash money, there are several apps that are essentially this method in digital form.)
1) Determine Monthly Expenses. Look at what you’ve spent in the past three months for your fixed and variable expenses. A fixed expense is one that occurs regularly and generally for the same amount. Examples include what you pay for housing, car loan, and insurance. Variable expenses include credit card bills, groceries, and gas. Three months should be plenty for you to determine how much you’ll need moving forward.
2) Assign Categories and Set Limits. Listing each category and assigning a limit is important. Write the category name on the envelope and the amount you’ll need for the month.
3) Determine Your Cash Needs. As mentioned before, there are some bills that are more practical to pay online or by check. Those should be totaled up and subtracted from your take home pay. The remaining amount would be used for your envelopes. You can withdraw cash at an ATM but be mindful of any daily withdrawal limits. Pro tip: if you’re a PSECU member, you can call us to have your daily limit temporarily increased. The limit will automatically reset the next calendar day.
4) Use the Envelopes. Add cash to each envelope based on your budget figures. When it’s time to shop for food, take your grocery envelope with you. When you’re going to fill up the tank, bring along the gas envelope. You get the idea. Here's the thing that will make or break this system: You cannot spend more than the cash in that category’s envelope! You must be disciplined enough so that you’re not taking some gas money to buy groceries.
And that’s about it. As you use the system, you’ll probably discover that you run out of money in one category and have unspent cash in others. Good budgeting is an ongoing process of monitoring and adjusting. The longer you work with the envelope system, the more you’ll understand how you spend the money you earn. It’s very empowering!
For more tips on making savvy money moves, check out our WalletWorks resources that include our blog, a podcast, videos, and more! They’re available for free at psecu.com/learn for members and non-members. If you’re not a member, you’re welcome to join our credit union and get in on perks like free checking, access to more than 70,000+ surcharge-free ATMs, and 24/7 digital banking. Apply today!