The Envelope System, for Beginners
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  1. #1
    Registered User Greebo's Avatar
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    Default The Envelope System, for Beginners

    I was writing this elsewhere, but then I thought, they may already know this, and someone else may not, so I figured, its half written up already, I may as well make a new thread of it.

    SO here goes. The Envelope system, for beginners. This is how, when your money is out of control, you gain control if it again, one step at a time.
    --------------------
    Start your budget by figuring out every single dollar you HAVE to spend. Put it into categories. Food, utilities, rent, insurance, car payment, minimum payments on debt, everything. How much you MAKE isn't important, its how much you MUST spend. Your first pass will be wrong, but do it anyway. Next month, you'll improve it.

    Write down each category on a page, with the minimum you must spend in a column net to the category name.

    Now, on a new page, write down the same info, but in priority order. Your tip 5 priorities are:
    1) FOOD
    2) RENT
    3) UTILITIES
    4) INSURANCE
    5) CAR PAYMENT

    After that, go in priority order based on what you Must have to survive at the top, down to what you owe other people at the bottom. DEBT LAST and to hell with the creditors thinking they come first.

    On this page, leave room for a 3rd column.

    Now, when you get paid, work down the page from top to bottom, and in column three, spend every dollar you got paid until there's no money left. Thats where your money goes. When you get paid again, go back and update the numbers.

    Cash your checks, for now, don't leave the money in the bank or it will fly away from you, because right now you're NOT in control of your money. (Sorry) Instead, make an envelope for every item, and put the money in it based on the budget, from top to bottom, as the money comes in.

    So for food as an example, say you need $200/month. You get paid $75.00 one week. Put a $75 in the allocated column:
    Code:
    Budget, July 2007
    CATEGORY BUDGET ALLOCATED
    ---------- ------- ------------
    FOOD        $200        $75
    RENT         $500        ---
    UTILS        $300        --- 
    and so on...
    Put $75 in the envelope. Use that envelope and ONLY that envelope for food.

    Now next week you get paid $250. Add $125 to food, and $125 to rent.
    Code:
    Budget, July 2007
    CATEGORY BUDGET ALLOCATED
    ---------- ------- ------------
    FOOD        $200        $XX $200
    RENT         $500        $125
    UTILS        $300        ---
    We've increased food to its max budgeted amount and started putting money in the next column.

    Put $125 in each envelope. DO NOT PUT ANY MORE MONEY IN THE FOOD ENVELOPE THIS MONTH. Spend the money from that envelope for food, and only that money. If you absolutely MUST spend more than you allowed for, say, food, then increase the food budget, but leave it increased going forward. Like I said, you'll start off with wrong numbers, but in 2-3 months, you'll nail it down.

    Continue this way, and review the budgeted numbers every 2 weeks, and update the allocated column every time money comes in.

    At the end of the month, do a new sheet for August, and start over. If there is money left over at the end of July, pay down debt with it. Do not carry it over to next month. If you run out of debt, then you have a small party.

    This is just the basics, but I hope they are useful to someone.

  2. #2
    Registered User Nada.Leona's Avatar
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    Excellent explanation, good job!

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    Default

    Thanks Greebo for posting this. I guess this system can work well for others.

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    That's certainly a good way to handle the out-of-pocket side of things, but how does it handle bills which are due on different days? I finally had to do a spreadsheet showing how much we need in the bank on the 10th, 20th and 30th of each month. Anything extra on those days can fill the FOOD envelope up to budget, even a little FUN budget so we don't go insane ... after which the overage goes into paying down credit cards. Amazing how fast each each month rolls around!

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    Registered User Greebo's Avatar
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    Quote Originally Posted by scottVee View Post
    That's certainly a good way to handle the out-of-pocket side of things, but how does it handle bills which are due on different days?
    Ah, now you're into the second lesson. Intermediate topics!

    This is going to be a much longer topic - so I'm going to split one super long post up into three, each with its own new budget

    For bills due on different days - such as those due mid-month, not at the end, you carry the balances over and reset them after their due dates OR after their paid if you haven't gotten enough in the envelope. On paper, you carry the end of month numbers over to the next month. In the envelope, it works the same way, you put money in until the goal is reached, then you leave the envelope alone till you need that money for that purpose.

    For bills due on more spread out times, it gets a little trickier. Lets say you have car insurance due once a year. The insurance is $1,500 a year. You have to figure out how much, per month, you need for that bill. $1,500/12 = $125. Now, each month, you have a monthly amount to be budgeted and allocated, but you also have an annual goal to work towards, so your budget needs to reflect that.

    All of this makes the budget a bit more intricate looking, but really, its not much different.

    So - take this more complete budget from the end of June.
    Code:
    Budget, June 30, 2007 
    CATEGORY          DUE     BUDGETED          ALLOCATED
    ----------        ---     --------         ------------
    FOOD                       $200             $200
    RENT              6/30     $500             $500
         
    UTILS                      $400             $350
    -----                      ----             ----
    - Gas             7/14     $200             $200
    - Phone           7/21     $125             $125
    - Internet        7/28     $75              $ 25
    
    Car Ins. (annual) 9/30     $125 ($1500)     $125 ($1125)
    Here we see an end of month view of the budget. In this example, I have hit the end of the month and I have successfully achieved my food and rent allocation goals. I have added a due date column for those items with a due date, and the money columns sometimes have two values. More on that in 3 paragraphs.

    My food budget has $25 in it, because during the month, I have used that money. I have put $200 into the envelope but taken $175 out. I only put money in when I updated the budget worksheet, I took it out whenever I went to the store. The envelope amount does NOT match the worksheet amount, which is why we use the worksheet amount. The worksheet tells us when to stop adding money, NOT how much should be in the envelope this minute.


    My rent envelope has $500 in it, ready for my landlord, right on target w/ the budget. If, however, I had paid the landlord early, yesterday, the envelope would be empty, but the worksheet would still be correct - I needed $500, I put in $500, I was done saving $500 for rent for June.

    My utilities are due on different days, so I have started saving for them, and have saved up for all of them but internet. Their envelopes have what the allocation column says, because its not time to pay them yet.

    Car insurance, I owe $1,500 by Sep 30. Its now June 30, so I'm 3 months from the deadline. My budget amount shows TWO numbers: $125 - showing how much this month I need to save, and ($1,500) in parens (), showing the total GOAL for the due date of $1,500.

    For allocation of insurance, I've put $125 into the envelope, ADDING TO the money already there, giving me a total of $1,125. Again, the number out of parens, the $125, is how much to ADD this month, and the number IN parens ($1125) is the goal for the end of the month. By June 30, I have added $125, and in the envelope is $1125.

    ...

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    Registered User Greebo's Avatar
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    Ok - so having completed the previous step, June was done.

    Now, flash forward a week. I get paid $800. Budget revision:
    Code:
    Budget, July 7, 2007 (First paycheck of the month, rcv $800)
    CATEGORY          DUE     BUDGETED          ALLOCATED
    ----------        ---     --------         ------------
    FOOD                       $200             $200
    RENT              6/30     $500             $500
         
    UTILS                      $400             $350
    -----                      ----             ----
    - Gas             7/14     $200             $200
    - Phone           7/21     $125             $125
    - Internet        7/28     $75              $ 75
    
    Car Ins. (annual) 9/30     $125 ($1500)     $ 50 ($1250)
    So what's happened?
    First, since the month ended, I reset my monthly allocations. Food and rent in this case. I dropped the allocated amounts for both food AND rent to 0.

    My budget amounts are unchanged, including for car insurance. Allocations are different for car, but hold on that a minute.

    So I got paid $800. I started at the top, highest priority first, and paid $200 into food, leaving $600.

    Then I put $500 into rent, so my next months rent is all ready to go, and here it is the beginning of the month. Wow, thats a HUGE stress relief right there! 600 - 500 = $100 left to spend.

    Next, I put $50 more into the internet envelope, achieving my $75 goal. The internet will be paid on time, 4 weeks away. WOO HOO. And I have $50 left.

    Now the car allocations have changed. I reset the number outside of parens to 0, because this month, I've added nothing to the car insurance envelope. My number inside the parens has gone from ($1,125) to ($1,250), because by the end of this month, this envelope needs to have a TOTAL of $1,250 in it. So my last $50 goes into that envelope, and my allocation now shows that I have put $50 in. I have $75 more to go this month (difference between allocated and budget).

    ...

  8. #7
    Registered User Greebo's Avatar
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    So finally - utilities due mid month, so lets jump up 2 more weeks to the next payday.
    Now, come 7/21, I'm going to pay the gas company $200 right out

    Code:
    Budget, July 21, 2007 (Second paycheck of the month, $800)
    CATEGORY          DUE     BUDGETED          ALLOCATED
    ----------        ---     --------         ------------
    FOOD                       $200             $200
    RENT              6/30     $500             $500
         
    UTILS                      $400             $350
    -----                      ----             ----
    - Gas             8/14     $200             $200
    - Phone           8/21     $125             $125
    - Internet        8/28     $75              $ 75
    
    Car Ins. (annual) 9/30     $125 ($1500)     $125 ($1250)
    Its 7/21 now. So between last budget and now, I have paid my gas bill and my phone bill, and reset their allocations back to 0.

    Then I got paid $800. Food is met. Rent is met. Gas is next up with an allocation of 0 so far, so it gets $200 in its envelope, leaving $600.

    Phone also is at 0 allocation, so put that money in the envelope. $600-$125 = $475.

    Internet hasn't been paid yet, but its due soon, so I'll mail that off, reset the due date, reset the allocation, and put in $75, leaving $400.

    Car insurance allocation so far was $50, so $75 goes into that envelope. $400-75 = $325.

    Now look at what has happened. I have paid all my bills on time. I have money set aside, NOW, for bills due NEXT MONTH.

    AND I HAVE MONEY LEFT OVER! HOLY CRAP!!!


    Because I rigidly stuck to my budget, and only spent money where it had to be spent, my money is now under control, and doing what I tell it, and the budget is WORKING.

    Now, in this example, I have been debt free, but lets say you have debt. What do you do with the left over money? PAY DOWN DEBT. You do not go buy that new computer game, you don't go buy a new pair of shoes (unless you redo the budget, and add a monthly category for clothing, which you should), you don't go out to dinner. YOU PAY OFF YOUR DEBT. Why? Hell if you ask that, you're in the wrong forum - go read the rest of this place then come back here.

    Now, IF you are debt free, then what?

    Then your budget should also have categories in it for:
    - Savings (Emergency fund)
    - Investing (5+ long term plan)

    And if you have money left over after all that, well - now you're going to need to find new budget amounts to spend all that money you've got left over at the end of the month. Things like long vacations, renovations, college funds for the kids, even a bucket called "mad money" if you want.

    Welcome to financial success!

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    Thanks for the info. Question: Would your above examples work if i was to break down the amount needed for to be put in each envelope on a weekly basis? Say, instead of putting $125 in one envelope one week, what if I broke that $125 down into seperate increments for EACH envelope? $40/food, $100/rent etc. In other words, take each of my bills, divide by 4, and put that much money in each envelope. Make sense? Dh's paychecks are never the same every week, so to my way of thinking this would make sure each envelope was steadily being filled. Thoughts?

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    Registered User Greebo's Avatar
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    Quote Originally Posted by hmabbott View Post
    Thanks for the info. Question: Would your above examples work if i was to break down the amount needed for to be put in each envelope on a weekly basis? Say, instead of putting $125 in one envelope one week, what if I broke that $125 down into seperate increments for EACH envelope? $40/food, $100/rent etc. In other words, take each of my bills, divide by 4, and put that much money in each envelope. Make sense? Dh's paychecks are never the same every week, so to my way of thinking this would make sure each envelope was steadily being filled. Thoughts?
    Before I answer, is there a minimum amount you can depend on DH's paycheck being?

    Now - I wouldn't recommend it, except for food, which is something you can buy every week.

    Here's why...

    Under the envelope system, after about 2 months, as you nail down the specific numbers, and dates, etc., those envelopes are going to start filling up automatically, in in the right order.

    See, everything you have to pay out* (see below), except groceries and household consumables, has a due date on it, so when you prioritize your budget, you put food first, because you gotta eat. The next three categories are shelter, utilities, and transportation. Those three are all equal priority - they come after food, and before everything else. Everyone of those items has a due date, so you can order them on the envelope system in order of due date:
    FOOD
    Car Payment 14th
    Electric bill 18th
    Gas bill 20th
    Insurance payment, 23rd
    Rent, 26th (5 days before due, always).

    If you fill up those envelopes in order of payment due, then the system will automatically do what you're trying to accomplish by splitting the money up over four weeks. It will take about 2-3 months for the money flow to stabilize (remember, you are taming what has been a raging river before, it is a process that takes commitment and time to settle out) but you WILL achieve stability, and the payments will be met automatically. Suddenly at the end of the month, in 2-3 months time, you're going to have a small heart attack when you realize that for the first time in years, the month ran out BEFORE the money.

    *Side note on "HAVE TO PAY". You generally do not HAVE to buy new clothes, shoes, books, computer games, booze, etc., on a regular basis every month. Those items are discretionary, and while they can have a place on the budget, they should generally come BELOW debt, unless there is a real need for something. (Example: Your new job requires you to wear scrubs, so now the scrubs are a top priority. Next month, however, new shoes just because you want them goes back to the bottom of the list.)

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    Thanks Greebo....excellent explanation! I didn't think of putting the envelopes in the order of due dates. Makes perfect sense!

    As far as dh's pay, I'll have to do the best I can. $300 might be a safe figure to have as a minimum. I'll just have to give it a try and see what works. Thanks again!

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    I have a great spreadsheet someone sent to me from DR site I use basically does the same only I just plug in numbers in excel (I am not an excel nerd) what you explained is great and goes into great depth

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    Wow, that is some unbelievable stuff. Thanks. I need to make a spreadsheet up. Thanks for the great information

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    This was a great explanation, so

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    Default Thank you.

    Greebo, thank you so much for these examples it really helped me understand.

    Great Job.

    -Omnimatty

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    Default Thank you, Greebo

    for taking the time to explain the envelope system in detail.

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