This past year I have started the envelope system (see Dave Ramsey's site), a dozen times. There is one problem that I found. When you are broker than broke, you don't have any money to put in the envelopes. You are struggling just to get food on the table and the bills paid. I didn't realize that step number one, was to get current. I do not know why that fact escaped me, but it did. Once it finally did, I didn't panic over not doing "Dave Ramsey" the way that he intended. I got current. I created a budget and now I am at a place where I can do the envelope system.
What is it? Basically, you create a budget and live on a cash system. You create envelopes for each of your line items, food, gas, clothing, vacation, etc. They are not really meant for things like the mortgage, utilities and such.
Here is what I did to create my envelope system, that I will be using in 2015.
1. Sit down and think of the things you need money for. You are creating "sinking funds" or as my Grandma called them "kitties", for each of those items. This year we need to go on a vacation of sorts, to have a memorial service for my Grandma. We are also moving into a house. We need to upgrade my husband's car. We want to start saving for Christmas NOW. You might want or need new furniture. This is a great place to save for those things.
2. For each of those items I created an envelope. Then I thought about how much I needed for each of those items. I know that I need $1500 to cover my out of pocket expenses for my medical deductible. I took that amount and divided it by how many paychecks I will have this year. That amount will then be what I have to put in the envelope each pay period (in cash). I went ahead and did this for all the items I created.
3. Look at your monthly budget and see if what you are putting in each of the envelopes, each pay period is do-able within your current budget (after paying for household and transportation expenses). If you do not have enough in your "discretionary" income to cover all the envelopes, you need to play with the numbers to make it work. Maybe you cannot go on vacation this year. Maybe you put half of the amount away and combine it with next years, to have a nice vacation. Maybe an envelope needs to be eliminated?
4. Make sure you have an envelope for fun. Just because you are living on a budget, does not mean you have to live like a hermit. It might mean you can only go to one movie every other month. Maybe you find free things to do. Take a few dollars and spend them on yourself. Depriving yourself completely is a sure fire way to burn out on this whole process. The key is to find balance.
5. Buy a safe. Get a safety deposit box, what ever you do, keep them separate from your bank account. Keep the money protected. Do not walk around with a wallet full of cash. It is asking for trouble. The one reason why I do not open different savings accounts for these items, or even just have one big savings account, is I want the items to be for something. I want to know that a certain bundle is to take a vacation. I do not want to mingle the money, because you have to give your money a purpose. Again, look into Dave Ramsey's theories on this. I know that if I have money in savings and I am out and about and I see something I want, I am tempted to move that money from my savings account into my checking to buy that item. If I have the money at home, I have to go home and get it. It forces me to rethink my desire. I almost always decide the item is not worth it.
6. Be flexible. If you find a certain envelope isn't working for you, do not be afraid to change things. But no matter what, do not use one envelopes contents to pay for another's. If you steal from the vacation fund to buy a pair of jeans when your clothing fund is empty, you are not allowing the envelopes to work for you.
7. I do not create an envelope for groceries or gas. I pay for gas using my debit card and I usually keep my grocery money in my wallet right when I take it out of the bank. I have a separate place in my wallet to put my "blow" money for the week, so I can keep it separate from my grocery money. If you feel you need a grocery envelope, that is what you should do.
That is pretty much the envelope system in a nutshell. I hope you take the time to look into Dave Ramsey's website on the subject. Feel free to ask me questions. Good luck in using your envelope system this year. I hope it helps you to reach your goals, to have some fun and stay within your means.