Attention Soldiers! Debt and his four generals (Fear, Ignorance, Entitlement,
Comparison) are spreading a deadly toxin called “overspending” across
the land. It’s wreaking havoc on the population because they don’t use a
spending plan. Over 70% of Americans reportedly live paycheck to paycheck
(NerdWallet). We must guard against this contagion strategically and tactically. We’ve already been briefed on the strategy of using a spending plan, aka budget. Today, the tactic
we’re going to use against the overspending toxin is a part of that strategy: a powerful antidote known as the “envelope system.”
What is The Envelope System
The “envelope system” involves allocating funds in cash for different categories from a spending plan. The allocated cash amounts are kept in labeled envelopes. To see how much money you have left to spend in a particular category, simply take a peek at what’s left in your assigned envelope. Very simple. Five common areas where people overspend are groceries, restaurants (going out to eat), entertainment, gas, and clothing. Using the envelope system will help you cut your spending in these areas.
How to Use The Envelope System
There are 3 key steps to effectively executing the envelope system. Step 1: Identify your category(ies) in question. Pick a category that you’ve previously had trouble keeping within budget. Step 2: Assign a specified dollar amount for a category and write it on an envelope. Take a look at an example. Let’s say you’ve budgeted $500.00 a month for groceries. When you get paid, withdraw $500.00 from your banking institution and put it in an envelope you label “Groceries.” Step 3: Wisely spend the allocated cash in the envelope throughout the month. Don’t forget, once the money for a particular envelope is gone, you’re done. Period. The envelope acts as your personal accountability partner.
No Robin Hoods Allowed
Many of you know the story of Robin Hood. He robbed the rich to give to the poor. You don’t want to do the same thing with your envelopes. When an envelope is depleted of cash, it’s done. DO NOT rationalize moving money from one envelope to another. This defeats the purpose of behavior modification. You need to “feel” the money dwindle down to zero if you spend it too fast.
Envelope System Rewards
What happens if you don’t spend all the cash in a particular envelope? You’re welcome. You’ve just successfully created financial margin or what my wife and I call “buffer” money. You should do 2 things with margin: 1. Leave a portion of it alone. Let it act as an untraveled bridge to the next paycheck. 2. Celebrate. Remember we are trying to prevent overspending. When that’s accomplished, take time out to celebrate. Reasonably, of course. You’ve earned it.
Soldiers, overspending is a bad habit for many people. The envelope system is a way to systematically create good habits. What areas do you have a tendency to go over budget on? How would the envelope system, if implemented, help you achieve your financial goals? Oorah!