The 3 envelope budgeting system is a simple way to spend less money on those troublesome categories where you tend to overspend. By using this simple money trick, you can save more cash and have enough money to pay for the things you really want. If budgeting isn’t your thing, use this simple 3 envelope budgeting system to control your spending and save more.
Other than having a job and earning money, the most critical thing you can do to improve your finances is to have (and stick to) a written budget. A budget is so fundamentally important to life that it should be taught in school. Unfortunately, how to manage money isn’t taught in school enough. So, I want to help people get started on their first budget by showing how to use the 3 envelope budgeting system. Your first budget doesn’t have to be complicated. All it takes is 3 envelopes, a pen, cash, and a little thought.
Fixed categories
Good news: we don’t have to worry about fixed budget categories in the 3 envelope budgeting system. What’s a fixed budget category? Something that’s the same amount every month. An easy example is your rent or mortgage payment. Each month your rent or mortgage amount is the same. This is usually true for other things too, like your car insurance, health insurance, internet, TV, and cable bills. Because these bills don’t change, we don’t have to worry about fixed budget categories when making our first budget. It’s not likely you’ll accidentally spend too much on your rent.
Predictably-changing categories
Some bills fluctuate (go up and down), but it’s predictable when they’ll be more and when they’ll be less. Two examples are your gas and electric bills. When you pump the A/C during those hot summer days, your electric bill goes WAY up! Or if you’re pumping heat on those freezing Winter nights up north, your gas or electric bill skyrockets. These two examples change month to month, but they should be somewhat predictable. Because they’re predictable, it’s a good idea to save up some money in the Spring and Fall to pay for those higher gas and electric bills in the Winter and Summer.
Troublesome categories
We all have at least one troublesome category where we could spend a little less. My buddy JD asked for my help to find a place where he could spend less money. He walked me through where his money goes each month. Two things that stood out were the $200/month on breakfast burritos and $800/mo on drinks at the bar. (He was single living in L.A.) He decided to invest in milk and cereal for breakfast and to “pre-game” with his friends at home before hitting the bars.
Forget about your fixed expenses and predictably-changing expenses. Think about the places where you spend money that you could easily choose to spend less. Eating out at restaurants, Starbucks coffee, alcohol, groceries, entertainment (like movies, bowling, concerts, etc.), and toys (like video games, new technology, etc.) are good places to start. Where do you spend money that you could probably spend less on each month?
3 Envelope Budgeting
Now, let’s create your first budget. You’ll need:
- Three mail envelopes (big enough to fit cash)
- A pen (or marker to write with)
Choose the 3 categories where you’d like to better control your spending. For JD, it was breakfast, bars, and beer. When I first started, it was groceries, eating out, and coffee. And don’t worry, spending less now will make it easier to spend more on these things later. (I now have a coffee category and freely spend that money at coffee shops.)
Write one category name on each of the 3 envelopes. Decide how much money you’re going to allow yourself to spend on each of these categories each month. At the beginning of the month, withdrawal the amount in cash, and put that cash into each envelope. This is the money you can spend on those 3 categories. When the cash in one envelope runs out, that’s it, you can’t spend anymore money on that category. The trick is to practice using only cash for these categories. You may be used to swiping a card at the bar. That’s what’s getting you into trouble. You’re not paying attention to how much you’re spending and you’re spending too much each month. Start using cash (your bartender will love you), and limit yourself to how much is in that envelope.
Your first budget
The 3 envelope budgeting system is your first budget, because it’s the simplest way to start paying attention to just a few problem areas where you spend money. It’s one of the most popular budgeting systems because it can be so effective (if you stick to it). My parents used it early on in their lives. Dave Ramsey recommends the envelope system. It works.
Try it out for 6 months. See if it works for you. If it does, leave a comment below and share your experience. Once you’ve mastered the 3 envelope budgeting system, you may be ready to try out your second budget: the simplest budget spreadsheet.