The envelope system is a popular budgeting tool that allows you to easily keep track of monthly expenses and limit spending in certain categories. I was initially attracted to the envelope system for its ease of use and suggested it to my girlfriend for our monthly food expenses.
When she arrived in Japan in September we agreed to split the food budget 50/50 and I thought if we each paid in advance to a monthly envelope we could avoid any arguments about money. Our first month is in the books and it was a great success. Here’s how to organize the process and what we’ll do to tweak it in the upcoming months.
- Track your expenses in the category for 1 month
In order to figure out how much money you need to put in the envelope for the month, you need to first find an estimate of your monthly spending.
We kept track of every food, drink, or restaurant expense from October 9th to November 8th. We created a Google Doc spreadsheet and every time we came home after spending in one of the three categories, we recorded the date, price, and place so we could analyze it at the end of the month. Make sure to keep your receipts so you remember to record the purchase when you get home.
Here is the actual spreadsheet we used (numbers are in yen; 87 yen = $1):
I also suggest that some people just keep a pen and paper list of your purchases instead of an online spreadsheet. We were diligent about recording our purchases, but the online aspect is a barrier that could cause you to get lazy and forget recording purchases. Keep a pen and paper on your refrigerator so it’s out and you’ll constantly be reminded to stick with it. It’s a little bit of work to record all the purchases for a month, but the goal of the envelope system is to make sure A) you don’t spend too much and B) it’s easy on you.
Do the work now and you’ll be thankful come months 2-4,921.
- Analyze your spending for the month
After you’ve tracked your expenses for a month you have your golden number. The total is a rough estimate of what you should expect to put away at the beginning of every month for expenses.
As you can see, we spent 45,574 yen during the month. We kept a detailed list because we also wanted to figure out where a majority of our food expenses were coming from and if we could trim any fat.
Our total was a little high because it was the first full month Corinne and I were eating meals together so we were doing a lot of experimenting with different foods at the grocery store. We bought more than we needed, but that was something we’ll take into account later.
Make sure to skim your list at the end of the month and look for anything odd. Perhaps you went out more than usual because you had five birthdays to celebrate. Or the opposite, maybe you didn’t go out at all because it was winter. Figure out if your totals are higher, lower, or about what’s you’d expect for an average month.
Our total was pretty accurate for an average month. We didn’t go out to eat as much, but we went to a big birthday party with all you can eat/drink that cost each of us 4000 yen (totally worth it, one of my favorite nights so far). But with the 8000 yen total for that night, we figured that that was about equal to 3-4 nights of going out to a restaurant normally.
- Add a safety buffer
Some people use the envelope system to stop themselves from spending too much in a category, but I think it’s better to be safe the first couple months of using the system. The last thing you want is to run out of money because you didn’t judge the numbers right.
To combat this, add a small buffer amount to your total (5-20% should do) so that you’ll be safe for the first couple of months. This is especially important during the first month of the envelope system because your calculations and expectations will probably be a little off.
The buffer acts as peace of mind especially for anyone who is cash strapped. The goal of the envelope system is to avoid overspending, but you don’t want to run out and have to end up putting groceries on a credit card you can’t pay off. After a couple of months you can remove the safety buffer and really reap the savings. But until then be safe.
Our safety buffer totaled 6,836 – 15% of our 45,574 yen total that month. We ended up putting 52,400 (rounded down 10 yen) into the money box for the month.
- Put the $ in a safe spot (envelope, box, etc.) and enjoy a worry-free month of expenses
Now that you have your number for expenses plus your buffer money you’re good to go for the next month.
We made a box that sits in our kitchen where the money is held. Whenever one of us needs to pick up food or if we go out to dinner, we grab some cash from the box and move on our way. We know that the money is split right down the middle so there are no disagreements about who is buying. It’s pretty awesome knowing you’ve prepared yourself for the next month and you never have to worry about getting cash from the ATM or if you should go cheap for the night.
- After the first month of use, analyze again
After the first month using the envelope system you’ll be able to easily find out how much you spent for the month. Just subtract the total you put in at the beginning of the month from the amount left to find out how much you spent.
I’m a numbers nerd, so I was really interested to see how our first month’s expenses while using the envelope system (Novemberish) compared to the month we tracked in October.
We began with 52,400 and at the end of the month our box had around 19,000 left (around because we literally had 138 one yen coins I didn’t want to count – I hate change). That meant we spent just 33,400 in November – a 26% decrease from the previous month. Oops.
We agreed that we became much more efficient with our grocery shopping the last month – using more of what we bought, figuring out which grocery store was cheaper, sales – which probably was the reason for spending about $135 less than the previous month.
This is a good conclusion though. We’d much rather be on the 26% decrease side than an unexpected 26% increase.
We used this data to tweak the upcoming month’s money box. We found the average of October and November’s expenses so we didn’t have to put in as much for the current month. (45,574+33,400)/2 = 39,487
Once again we added a 15% buffer (5,923) which meant we put 45,410 into the box for December 9th-January 8th and we’re ready to go.
Conclusions
I’d recommend every one at least try out the envelope system. I love the simplicity of not worrying about expenses while still getting the data at the end of the month. I wouldn’t want to keep track of every expense for the rest of my life, but I want to see the ups and downs each month.
You can adjust the system to your situation as well and include any discretionary spending like entertainment, clothing, etc.
The envelope system is a win-win. It’s a helpful way to save money by constricting cash, but it simplifies your financial life in the meantime.
Good luck!
Do you use the envelope system? How do you tweak it for your situation? Hate the envelope system? I’d love to hear from you as well.
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