As you may have seen or heard in the past, an envelope system is a simple but effective way to manage your money. You determine categories for your spending, and what percentage of your income needs to be in each category to pay for your obligations. This works particularly well to make sure you have enough money to pay for your bills. The moment I realized I needed to change my money habits was when the car insurance bill arrived in the mail and I honestly did not know how I would pay it. An envelope system helps prevent this scenario by enabling you to plan ahead.
Let’s say you need to pay $240 for car insurance once a year. (Please let me know how you got such an amazing price!) To keep this example simple, let’s pretend you get a paycheck once a month. Each month, you would need to set aside $20 in your car insurance envelope. When your bill comes due, you will have the amount you need to pay. Goodbye, money stress!
To set up your envelope system, you will need to decide on your categories, then figure out how much money needs to be in each envelope. Then, when you have money come in, you divide it among your envelopes. This seems simple enough, but how many categories should you have? What should they be? How should the money be divided? Today, let’s just focus on the number of categories.
As I’ve mentioned previously, I’m no stranger to the envelope system. I’ve been using it on and off since I was a teenager. I know the value, but sometimes I fell off the proverbial wagon, and dealt with the stress that inevitably followed. What was the common factor that threw me every time?
Making my system too complicated.
If your money management system is too complicated, you won’t maintain it. It’s similar to giving your kitchen a thorough clean. For a few glorious moments, everything is shiny and beautiful. But, if you don’t remember to throw away the junk mail everyday, and wash the dishes, and de-crumb the counters, your beautiful kitchen will quickly disappear. I want you to stick with your envelope system for the long term, so let’s start by keeping the system simple.
Less categories equals a simpler system.
When my husband and I first got married, we kept running totals of all our categories in a notebook. It was a good start to learning to keep our finances in order. Unfortunately, we had way too many categories. We had a category for groceries, household items, gas, home improvement, etc. This actually required us to split the totals on receipts. Splitting a 40 item store receipt four ways does not sound like a pleasant way to spend my time. Needless to say, I let it slide and eventually abandoned it. It didn’t take too long before I was panicking when the car insurance bill came.
I now have a much shorter and simpler list of categories. They are versatile, and may work for you as well.
- Bills: mortgage payment, electric bill, phone, internet, garbage pickup (These bills are relatively predictable each month aside from the electric, which I estimate high.)
- Daily: groceries, household items, gas, online orders, clothing, thrift stores, etc. (I know roughly how much we need for groceries and gas, and add more for other things. When this account is getting low, we eat more from our pantry, don’t go to other stores, etc.)
- Medical: chiropractor, pills, dentist, plus extra for emergency room (Some are regular and can be anticipated. I recently had surgery, so I made arrangements for payments and put every extra penny into this account. I was able to pay it off in less than 3 months this way.)
- Insurance: car insurance and registration semi annual, life insurance annual
- School: We homeschool, so this account covers curriculum, membership fees, etc.
- Home and heating: home improvement as well as propane and firewood for the winter
- Farm/pets: feed and care for farm animals and several pets
- Emergency fund: only touched when there is no other way to cover a needed expense. If properly funded, it can help you ride between jobs.
- Car repair: covers tires, batteries, fluid changes, and bigger repairs, gas comes out of daily category
- New car: We don’t finance cars, so we save ahead for when we need to replace a vehicle.
- Saving for something special: Sometimes we create a category to keep track of the money we are saving for something special. For example, right now we are saving for a family trip to Mackinac Island.
That is pretty much it. With these categories, I don’t have to split receipts, so subtracting expenses goes much faster. I will be explaining the exact tools I use in future posts. This number of categories has allowed me to keep up with our finances for several years now. Would this number of categories work for you as well? What categories could you skip, or would you need to add another?