327. Revolutionize Your Budgeting with the Envelope System

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Join Ryan Nelson as he introduces the Envelope System, a simple yet effective budgeting tool to manage common expenses like groceries, holidays, and car repairs. Learn how using cash envelopes can revolutionize your spending habits, help you plan ahead, and reduce financial stress. Discover practical tips on setting up your envelopes, adjusting for variable expenses, and using your tax refund to get a head start. This episode provides actionable advice to help you maintain a consistent budget and achieve financial peace. 

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Episode Transcript

Ryan Nelson (00:00):
Back to school supplies, christmas, birthdays,
groceries, car repairs.
What do all of these thingshave in common?
Well, all of these things arecommon expenses we deal with on
a weekly, monthly or yearlybasis, and yet many of these
things surprise us when theyshow up.
I remember, year after year,being shocked at the school
supply costs, or that Christmascame right around the corner and

(00:21):
not having the cash to pay forstuff.
Or when my car needed new tiresand having to take out the
financing for them because I andnot having the cash to pay for
stuff.
Or when my car needed new tiresand having to take out the
financing for them because Ididn't have the cash.
Well, today we're diving into asimple yet powerful tool that
can change all of that, and it'scalled the envelope system, or
you may have heard it referredto as cash stuffing, and it's
about to revolutionize the wayyou budget.
So stay tuned.

(00:42):
My name is Ryan Nelson, and mywife and I paid off $160,000 in
debt over eight years while wewere raising three kids, and I
got to tell you we love theenvelope system and we still use
it to this day, even afterbeing out of debt for over four
years.
It makes it so easy to pre-planall of the things you don't

(01:04):
really think about until youneed them.
And so from my experience,besides setting up our first
emergency fund, this is thesingle biggest thing that my
wife and I did that helped usstick to our budget consistently
, and it also helped us cut downon our money fights and our
disagreements.
So let's explain the envelopesystem if you're not familiar.
So let's imagine you have astack of envelopes, each labeled

(01:28):
with a different spendingcategory.
They could be groceries,restaurants, entertainment, car
repairs, christmas, birthdaysand so on.
At the beginning of each monthyou decide how much cash you're
going to allocate to eachcategory.
So let's say, for Christmas andbirthdays, you spend an average
of about $600 per year.

(01:48):
You would physically stuff $50each month into that
corresponding envelope.
So for 12 months times, $50 is$600 for the year, and so when a
birthday or Christmas pops upor comes up, you would be able
to take the cash out of theenvelope and make that purchase,
and that same concept wouldapply for each of the other

(02:10):
envelopes.
So here's the key Once themoney in that envelope is gone,
you're done spending.
You basically are not allowedto spend anything else that
month for it.
So let's think about groceries.
If you allocate, let's just say, $100 a week in groceries and
you take your $100 a week andyou go to the store and you

(02:31):
spend it, you're not allowed togo back to the grocery store
because you spent money out ofthat envelope for the week.
So why does that work?
Why does this make a difference?
There's something about handingover cash that makes you think
twice and, honestly, when wefirst started doing this with
our groceries, it made us reallyaware of what we were spending

(02:51):
in the store, because I only hadcash to pay.
I couldn't be five, 10, 20, $40over and pay for it with a
debit or a credit card.
And that's because it triggersa different part of our brain
than when we're swiping our card.
We actually feel the moneyleaving our hand and it's a
reminder of your spending and itmakes you more mindful of what

(03:12):
you're purchasing.
It also works because it helpsyou plan ahead for the year,
instead of panicking over schoolsupplies like I've done, or
panicking over Christmas.
You've been saving each month.
So when school supply shoppinghappens that one time a year,
you've been saving up for theyear and you have the cash to
pay for it.
So what about things likevariable expenses?

(03:32):
I've talked a little bit aboutgroceries.
Let's say your grocery billvaries from week to week.
So one strategy would be toaverage your grocery spending
over the past few months and usethat as your monthly envelope
amount.
So if you're averaging for themonth $600, you would average
$150 a week for groceries.
It means one week you mightspend $200 and another week you

(03:54):
might spend $100.
Leftover funds, which meansmonth after month after month,
you're having more left in yourenvelope than what you're
spending.
You could potentially adjustyour spending down for the
groceries and allocate thatmoney somewhere else.
And if you're consistentlyrunning out meaning that you
spent 150 for the week and boy,I still need stuff at the

(04:17):
grocery store and that'sconsistently happening Well,
that might be a key where someof the envelopes you're funding.
You would maybe reduce those alittle bit and increase your
grocery envelope.
So let's talk about timing.
You may ask yourself likewhat's a great time to set up
your envelope system?
And I will say for us it wasduring tax season and if you're

(04:38):
like millions of Americans,you're probably thinking about,
or maybe you've already received, your tax refund and it's a
great opportunity to get thisstarted.
Your tax refund is going to bea lumps up of money that can
help you get a jumpstart on yourbudgeting goals.
Instead of letting it disappearinto your general bank account,
where inevitably it will getabsorbed into everyday expenses,

(04:59):
why not use it to pre-populateyour envelopes?
So I think and this is 100% forme and my wife I think we had
our tax money spent 10 differentways before we received it, and
we used to do that all the timebefore we really took control
of our finances.
So instead of immediatelyspending it or thinking of all
the ways you're going to spendit, you can sit down and

(05:21):
allocate a portion to each ofyour envelope categories.
For example, you could fullyfund your grocery envelope for
the month.
You could fully fund yourclothing envelope or even a
dedicated envelope for irregularexpenses like car maintenance
or gifts.
Like you might know that yourtires are going to be replaced
later this year, so you could goahead and fund that ahead of

(05:43):
time or get a lot of money inthat envelope in preparation for
that.
Because when you're firststarting the envelope system
especially if you're brand newto it and you've never done it
you might start it around schoolsupply season where you haven't
been saving for school supplies.
So when the school suppliescome you might only have $50 in
there, and so that's not enoughand so right away you're kind of

(06:05):
already behind the eight ball.
So having that lump sum ofmoney from tax season can really
help you get the envelopesfunded ahead of time so that you
can kind of have successrunning out the door.
And by doing this you're notonly setting yourself up for
success, but you're also takingthe pressure off of those first
few weeks or months of budgeting.
You're not scrambling towithdraw cash or use a credit

(06:27):
card or feeling stressed aboutrunning out of funds.
You've already given yourselfthat head start.
This is one of the most commonobjections to the envelope
system is that carrying cash isnot very convenient, which I
agree.
There is some inconveniencewith it.
I'm not going to sit here andsay it's not inconvenient.
It is in the digital age.
But think of it this way what'smore inconvenient, like that

(06:49):
few extra minutes at the ATM ormonths of stress and debt?
The envelope system is aboutprioritizing your financial
well-being, even if it meansmaking a few small adjustments
to your routine.
Now one of the inconvenientthings that we did not do is
when it came to gas, wecontinued to buy our gas using a
debit card, because, from aninconvenience standpoint, it is

(07:13):
inconvenient because in today'sday and age you can't just fill
up and go in and pay.
You have to go in and give thema certain amount and then you
can only fill up to that amount.
So, from our perspective, thatis the one area where we never
had an envelope, but that maywork for you if that's something
you want to do.
So I want to challenge you totry the envelope system for just
a few months.
Use this tax refund season as away to get a jumpstart on it.

(07:36):
Don't go spending your taxmoney on something and then
you're frustrated a few monthsfrom now because you don't have
the money.
Start with a few key categoriesand just see how it goes.
I think you're going to findlike I did and that my wife did
it's going to make a hugedifference in helping you stick
to your budget.
Hey, if you want weekly tips,stories and helpful information
delivered to your inbox eachSunday afternoon that helps you
take control of your personalfinances, sign up for our weekly

(08:00):
newsletter Simplify my Moneyand we are going to be releasing
an upcoming newsletter that'sgoing to take a more in-depth
look at the envelope system.
The link to sign up for that isin the show notes.
Thanks for joining us today andwe will see you on an upcoming
episode.