envelope method

The Envelope Method Revisited

A while back I wrote about using the envelope method to help manage expenses and cash flow. Because I believe in simplicity, there may be a simpler way to use this powerful method.

First, a background on the envelope method: I started using this method when I was a teenager through the guidance of my father, and later read about it in one of Dave Ramsey’s books. Basically, the envelope method requires that you set aside a portion of your income in cash between multiple envelopes for your expenses. This helps you to budget for your expenses, decrease wasteful spending and debt, and even out the ups and downs of your cash flow. Do not scoff at this method, as it applies regardless of your income.

Although you can set aside cash for all of your expenses, the most practical way is to set aside cash for your variable expenses that you can easily pay cash for. This includes expenses such as groceries, gas, clothing, dining, and spending/miscellaneous expenses. Other items can be automatically deducted from your paycheck or checking account, such as saving for Christmas gifts and vacations, and automatically be deposited into a separate savings account.

Also, to make the envelope method easier to follow, you should try to keep the number of envelopes to around five. I actually recommend writing the date, amount contributed or spent, and the balance on each envelope. For a sample envelope, you can email me and I will send you a sample as a Word document.

Are You Overwhelmed By Debt?

Why or how do so many people get into trouble with debt? When does it become a problem? There are so many reasons, such as job loss or, health problems, but overall it is a disconnect between income and spending, and not enough focus on financial management.

I’d like to share a few simple ways to reduce your debt and help to minimize its use in the future. If you keep it simple, you are more likely to be successful.

Stop incurring more debt: You can’t get out of debt if you are still using your credit cards. Do not increase your debt or you will never get out.

Emergency fund: By building up an emergency fund, you are less likely to take upon more debt for something unexpected. For now, it can be around $1,000 to start. Ideally, you will want to work towards 3 to 6 months worth of expenses, but it doesn’t make sense at this point to save $10,000 and simultaneously have a $10,000 credit card balance.

Budget: If you are serious about reducing your debt and improving your financial situation, you need to take the time to make a budget. You can use software, such as Excel or Quicken, but a very simple and effective way is to use envelopes. For example, if you are paid weekly by your employer and spend an average of $200 a week on groceries, then place $200 in an envelope labeled groceries. When you go food shopping, bring this envelope so that you can only spend$200 or less. This can be done with all other expenses. It is simplistic, but if it is done right it is extremely effective. My father taught me this one.

Know what you owe and prioritize: Make a list of all of the debts you owe, including credit cards, auto loans, equity loans, mortgages, student loans, etc. Now you need to work at chipping away those debts. The rational place to start is with the highest interest debt, but I don’t recommend this. You should actually try to pay off the smallest balances first because it will give a sense of accomplishment. Once the smallest is paid off, then use that payment toward the next balance. Finances are extremely psychological, as most of our financial decisions are emotional-based.

These few steps are a good place to start to manage and reduce your debt. If you are serious about debt elimination, you will not look for shortcuts, but rather ways to increase your income to pay off your debt sooner and take control. Focus and simplicity are the keys. If you need more help you can contact my office. Additionally, there is an excellent book on this topic that parallels my thoughts on debt, entitled “The Total Money Makeover” by Dave Ramsey.