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The Modern Envelope System

The modern envelope system “We always knew the light blue envelope was for treating the grandchildren!” That’s the memory one of our employees had of grandparents who used the envelope system to budget their money. While different-colored envelopes for different expense categories may have been an easy way to control expenses back then, there is now an even easier – and much more secure – way to divvy up your income.

The goal of the envelope system is to avoid overspending in any one category of your budget, but particularly for discretionary expenses like entertainment, dining out, or gifts. The “envelope” name derived from the fact that in the past people often divided their inflow of cash into separate envelopes labeled – and sometimes color-coded – by category of expense. For example, one envelope would be just for the month’s entertainment expenses. Cash would then be put into envelopes to later be withdrawn as needed to meet expenses. Only the amount in the envelope could be spent and any left-over amount at the end of the month was put into savings.

This type of approach can work wonders if you are the kind of person who tends to “use up” your available funds or if you use available credit for unnecessary purchases that haunt you later. If you respond well to limits and structure, knowing that you have a finite amount of cash could really help you take strides toward putting your money to work on your goals in life.

It’s not necessarily a great idea to leave large amounts of cash lying around the house in envelopes, so the better option these days is to use multiple checking accounts and at least one savings account.

Here’s how to make it work:

  • Start with a budget to make sure you have a grasp what limits to set in each category.
  • Confirm with your financial institution that they allow multiple checking accounts for one person or a couple and don’t charge any extra fees for this.
  • Confirm with your HR department that they allow a deposit of your check into multiple checking/savings accounts.
  • Name your multiple accounts after the categories they will be used for.
  • Make sure to label your separate debit cards or checkbooks too.
  • Opt out of overdraft protection on the separate checking accounts since having it would defeat the purpose of having a limit on the money you can spend in a category.
  • Put in the maximum amount for bills that may vary – like heat or electricity – to make sure you are covered for the higher months. You can always transfer unused money into savings later.
  • Leave a little extra in each account in case of errors in calculation.
  • It’s probably best to use credit cards only for emergencies if you are using the envelope system, since using credit for extra expenses again defeats the purpose of using the system.

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Smart Tips
Ten Characteristics of the Best Budgets

  • Has been measured against actual spending activities for a period of time
  • Is realistic for your situation
  • Allows for savings, especially for emergencies
  • Helps you work toward stated goals
  • Has “rewards” built into so that you aren’t depriving yourself
  • Lets you adjust on-the-fly if circumstances change or initial projections aren’t accurate
  • Doesn’t include overtime or bonuses as a part of guaranteed income
  • Reflects empowering choices
  • Has input from everyone whose life will be impacted by the budget
  • Is as thorough as possible

Recommended Reading

The Four Week Financial Turnaround, Olsen & Olsen Financial, 2012

Unless you live in a remote mud hut, you are bombarded with unrealistic ads about affecting change in your life. “Get tighter abs in just 8 minutes!” “Stop smoking by tomorrow!” These pitches always ignore the reality of getting healthier: it takes a prolonged lifestyle change. At first glance, the title of Derek C. Olsen’s recently released book, The Four Week Financial Turnaround, might seem like one of those “get better fast” come-ons. But Olsen’s book succeeds by emphasizing not just a narrow timeframe for improvement, but instead the instilling of healthy money habits.

No one is ever going to be able to hit every category in their budget on the nose 100% of the time and Olsen gets this. Instead of having the reader focus on Draconian measures for austere living, this book puts a positive spin on using a budget as a tool for making your money do what YOU want it to. By using Olsen’s exercises for examining why you make the money choices you do and then putting that information to use, you can empower yourself to adapt sustainable tactics that will put you in better standing with your money. It won’t happen overnight, but you can do it.

Next Steps

There are many resources available from PenAir to help you take steps to securing your financial future. Here are just a few:

Meet With a Financial Coach
Get One-on-One Counseling
Financial Fitness Courses
Explore our free resources
Financial Calculators
Crunch the Numbers
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