﻿Saving money is like exercising. We all know we need to do more of it, yet we all struggle with
it. Hi, if you are new to the channel, my name is Tae from Financial Tortoise. Where we learn to
grow our wealth, slow and steady. In today’s video I want to share with you a guaranteed strategy
to save more money. I really struggled with this most of my 20s. I always knew I had to save more
money. So I had more to invest for the future. So I could reach financial independence sooner. But I
just could not get myself to do it. No matter how often I told myself I needed to, when I looked at
my bank account at the end of each month, there was just never enough. But I learned about the
envelope system during a Dave Ramsey conference and it completely changed how my wife and I were
able to manage our spending. So in this video, I’m going to deep dive into this envelope system
so you can learn to improve your savings rate as well. This video is broken into three parts.
So feel free to skip around to sections you would find most useful. First, we’ll review the
fundamentals of the Envelope system. What it is and how it works. Second, we'll discuss some best
practices when it comes to the envelope system. Like anything in life, it takes a few trials and
errors to get something right, and I want to make sure you are starting off on the right footing.
And third, we’ll cover some advanced level envelope system methods. More specifically,
how to go digital with the envelope system. Alright, let’s talk about what the envelope
system actually is. It’s actually quite simple. The envelope system is a way to track your money,
by keeping cold hard cash tucked away in an envelope. You have an envelope for each
category of your spending. Such as an envelope for groceries. An envelope for clothes. Or even
an envelope for entertainment. You fill it at the beginning of the month based on your budget,
and you only spend what is in the envelope throughout the month. If you run out of cash,
you are done in that category. You just stop spending. Simple right? So why is
it so powerful and why do I have a whole video on it? When I first heard about this concept,
I initially was pretty skeptical. I mean in the first place, who uses cash these days. And second,
I couldn’t help but it remind me of my parents and my grandparents. It felt so archaic and old
school. But I overcame my skepticism and tried it out nonetheless. At the time when I learned
about this system, I was at a pretty low point as regards to my finances anyways. My wife and I
had just gotten married and we were struggling to pay off our $105,000 of student loans. I thought,
it couldn’t get any worse right? Why don’t we give it a try? Most often, one of the major reasons why
we overspend is because there is nothing that tells us when to stop. Yes, we might know in our
mind that we should stop spending, but if there is no hard barrier, it’s so emotionally hard. Things
keep coming up that require our money. Starbucks on the way to work. Target on the way back from
work. And that new restaurant we want to checkout over the weekend. The envelope system forces us
to stop because if we are using only cash and we run out, that is it. We physically can’t spend any
more money. It enforces discipline. In addition when we use cash, it makes us more aware of our
spending which raises accountability. When we see the cash dwindling with each expense,
we instantly become more hyper aware of our money. Alright, so how do I set it up? Let’s spend a few
minutes going through the mechanics of it in more detail. There are three simple steps to
implementing the envelope system. Step 1 is to set up your categories and budget for each category.
When starting out, start out simple and pick just a few categories that you tend to overspend on.
I’ve seen most often these categories are groceries, restaurants, entertainment and
clothes. Talk with your spouse to figure out what an ideal budget would be for each category. And be
realistic about it. If you normally spent $1,000 in restaurants each month for the past 3 years,
don’t overnight try to cut it down to $100. You are setting yourself up for failure.
Start out with an ideal, but realistic goal. Maybe trying to cut it down to $800 or $700 next month.
Step 2 Step 2. Once you have your budget amount for each category, at the beginning of each month,
go to your bank and actually take out cash to fill these envelopes. The first time I did this,
I admit it felt really weird. It had been years since I’ve been to my bank and I wasn’t used to
handling so much cash. But, my wife and I were pretty serious about changing our spending habits,
so I swallowed my awkwardness and did it. I had several envelopes labeled with each
category of spending and I filled them with our budgeted amount. And the last, and most
important step is to actually spend from your envelope. And only from your envelope. And I have
to admit. We were not very good with rationing out our spending. At the beginning of the month,
we felt like we had all the money in the world and bought groceries and went out to restaurants like
nothing had changed. But then came halfway through the month and we started to notice
that the envelope was getting pretty thin. Some months, it’d be only the 2nd week of the month,
and we would have no more than $20 remaining in our groceries envelope. We spent the 2nd half
the month eating whatever was leftover and would get excited whenever free meals were provided at
work. It wasn’t the smartest way to manage our spending, but at the end of the month,
we stuck to our budget. Not by choice. And not smooth by any measure, but we did it.
This envelope system had worked and that was what mattered. It was the first time ever we were able
to stick to our budget and this eventually led to us increasing our savings rate and even at
one point, we were saving 50% of our income. Envelope system best practices. Let’s talk about
some best practices when it comes to developing and managing your envelope system. First is not
to have too many envelopes. The envelope system is really effective when you narrow it down to just a
few categories. Ideally no more than 3 to 5. And focus on categories where you have the hardest
time managing your spending. For my wife and I, the category we really struggled with was food.
We loved going out to eat and it was so natural for us to try out new restaurants after work. So
that was what we started out with first. We felt if we could control our food expense, it gave us
hope and motivation in other categories. Another best practice is to have monthly envelopes. Not
weekly or bi-weekly. A month is a good time frame to wrap our head around. And most often
we can calculate our monthly spending targets much better than weekly or bi-weekly. Another good best
practice that worked really for my wife and I was to each have a personal envelope. For our personal
expenses not tied to the household. Budget can feel stifling if we don’t have some sort of an
outlet. So it is important that you allow yourself to have some fun along the process. Not too much,
but enough to keep you motivated and going. So we used to have a personal envelope labeled with each
of our names that we were allowed to do whatever we wanted with. Guilt-free. Of course make sure
to come up with a good, reasonable budget for this category in discussion with your spouse.
Another thing you want to note when you are implementing your envelope system is
that you need to incorporate trial and error. Whenever you are trying something new in life,
it will never work out exactly as planned. You might realize that the budget you set is just too
little. Or this category of spending just doesn’t work with the envelope system because you have to
pay bills online. Regardless, don’t give up just because it doesn’t work the first time around. It
likely will take several months before you figure out what works and what doesn’t. For us we hit
this wall when it came to the gas budget. Unless we fundamentally changed how we got to work,
the amount of gas we needed in our car wasn’t something we could change with our behavior.
So after a few times, we abandoned using the envelope system for this category
and decided to focus our efforts in other categories we had more control over. And
the final best practice I want to share is that, despite how archaic this system might feel. And
how you might want to jump right away to a more digital format, as I'll share in the next section,
try starting out with cash. I was skeptical too initially. However, there is just something about
cash that is so different from using a credit card. And if you grew up in a generation that
isn’t used to cash, I believe more reasons to try it out. It’s weird, but you get an emotional
connection to your money. You see it and you feel it. And you start to have a visceral reaction to
letting it go. It definitely isn’t a long term strategy, but if you haven’t used cash for a
long time or ever. I highly recommend at least trying it out for a bit to see how it feels.
You’ll get a completely different appreciation of money. Alright, let’s talk about a digital option
to the envelope system. My wife and I are very thankful to the cash envelope system. It taught
us some amazing spending habits and really taught us a lot, especially about ourselves. However,
we are living in the 21st century now. So despite how much we enjoyed the cash system,
it didn’t make sense for us in the long run. So we eventually transitioned to a digital format. The
app that we transitioned to is called Goodbudget. There is a paid and a free version, but we’ve been
completely fine using the free version for almost 10 years. You can only have 1 account under the
free version, but on two devices. So my wife and I share one account on each of our phones. Which
works out great because we share many of the envelopes and we can see whenever each of us
spends out of each envelope. There is a desktop version and a smartphone version. I tried the
desktop version, but since I use it primarily for my discretionary spending, I use the smartphone
app the most. The way it works is pretty simple. Envelope, but on your phone. You create envelopes
and set a budget for each envelope. The work here is that you need to input each spending you make
manually into each envelope. Unlike other online softwares like Mint or Personal Capital, where you
can link your credit cards and you import your transactions automatically, Goodbudget doesn’t
do that. In addition, because there is no actual empty envelope to stop you from spending more,
you can technically go over. The responsibility to stay under your budgeted amount is on you with
this digital method. But it is a really simple system. If you just want to know how much you have
left at the end of each month in each envelope, the Goodbudget app is perfect for that. What I
notice oftentimes is that the more complicated a system is, the less effective it becomes. My
wife and I followed the cash system for at least a year before transitioning to a digital method. The
year that we spent using cash was really helpful in cementing our spending habits. But I did miss
all the credit card rewards and having a digital record of all our spending. If you are struggling
to manage your expenses, consider the envelope system to jump start your spend management.
If you like to learn more about areas where you can cut back on, check out my video on “7 Things
I Stopped Spending Money On” here. Thank you guys for watching and until next time. All the best.