50% of Americans are in debt. In fact, the average household debt is just over $8,000! That means millions of people are searching for a way to get out of debt while the others are struggling to avoid it. One budgeting system that financial gurus like Dave Ramsey have vouched for is the envelope system. This system is a simple way to make sure your money is going where it is needed first.
The idea is straightforward. First, you need to create a budget. Look at your spending over the past few months and see where your money is going. Create categories in your budget so you can start grouping together purchases like Grocery, Restaurants, Entertainment, Bills and look at how much you are spending in each. If your total spend is greater than your income for the month, you are going to need to cut back on some things to avoid debt. Once you have figured out your budget, grab an envelope for each category and write the category and amount on the front of it. When you get paid or find a few extra dollars, put the correct amounts into each envelope. When you need to go to the grocery store, take the money out of the correct envelope to use and once that money is gone, it’s gone. The key to this system is that you are putting the money where it is needed as soon as you get it. This ensures that you’re never stuck wondering what happened to your bill money and you can control your spending in all categories.
The envelope method originated during the Great Depression, a time where people did not have a lot of money to spare and they did not trust their banks to store it for them. Now, with the Internet, you don’t even need to use physical envelopes anymore. There are multiple tools available online that allow you to create virtual “envelopes” and store your money for when it’s needed. The online version of this can also protect your money from being lost or stolen; however, many people still prefer the visual that physical envelopes provide.
The envelope budgeting system is certainly not the only solution out there but it is one that has worked for many. While switching to cash only may not seem feasible, remember that studies have found people spend less when using cash compared to debit or credit cards. However, the best budgeting system is one that you will actually stick to. There are many alternative systems out there if this is one is not for you, so go out and try a few to see what you like. Creating a budget is always the first step to getting and staying out of debt though, so make sure you know where your money is going.