The Benefits of Envelope-Based Budgeting

Some consumers say they prefer the old-fashioned method of separating out expenses.

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I’m always on the lookout for new budgeting tools, so I was curious to hear about Mvelopes, a service that helps people track their spending and start saving more. The concept, as the name suggests, is based on traditional budgeting with paper envelopes—a system that four in ten people use, according to a recent Chase Slate-U.S. News Consumer Monitor survey. Mvelopes is a subscription-based service that helps you track your expenses, savings, and bills online. So, how exactly does it work? I spoke with Mvelopes’ rep Delilah De La Rosa, who has used the service for five years. Excerpts:

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Why did you first start using Mvelopes? What had you been doing to manage your money previously?

I had already been out in the working world a couple of years and was sick of always living paycheck to paycheck and being in debt, despite my pay raises and promotions. Back then, my idea of budgeting was to make sure I paid all my monthly bills and not spend over what was left in my checking account, which I considered disposable income. I am a very hands-on person so on a daily basis I would check my bank balances to see how much I had left to spend.

While this “method” helped me to not incur overdraft charges on my checking account, it was too reactive and did nothing for me in terms of avoiding the last-week-before-I-got-paid desperation as I waited for my next paycheck. It also did not help me plan in advance or assist me in getting rid of my debt.

While I was searching online for a sample budget, I came across Mvelopes. The envelope budgeting method had been practiced for many years in a cash-only world and had helped many, many people achieve financial fitness.

How did Mvelopes help you start managing your money better?

For those that don’t know about envelope budgeting, it is a long-practiced budgeting method that was prevalent before the days of checks and credit cards. Back then, people would cash their paychecks and allocate that cash into individual envelopes labeled according to their monthly and periodic expenses.

If you had to go grocery shopping, for example, you would take your “Grocery” envelope with you to see how much you could afford to spend. If you didn’t have enough money to go shopping as you pleased, you had the option of waiting until you were able to fund that envelope again or you could take cash from another envelope and transfer that cash into your “Grocery” envelope. Conversely, whenever you had cash left over in a particular envelope, you had the option of keeping that cash in the envelope to add to its next month’s funding or adding those “leftover” funds to your “Savings” envelope.

That’s why the envelope method worked so well with periodic expenses such as vacations, auto servicing and repairs, holiday spending, etc.—these envelopes physically held onto cash you would fund on a monthly basis until you decided to draw from them, like mini savings accounts. Overall, it was obvious to me that with envelope budgeting, there was no way for me to overspend, but plenty of ways for me to know in advance what I could actually afford. It gave me the ability to plan in advance how I wanted to use my money.

Now, instead of looking at how much money I have left in my checking account to see if I can afford something, I look at the virtual envelope to which that potential purchase is related. Even if I choose to use a credit card to make a purchase, I know I am drawing from money I actually have and not from credit available that just serves to increase my debt.

[For more money-saving tips, visit the U.S. News Alpha Consumer blog.]

What are some examples of hidden costs that you found?

In my line of work, I always have to be on the go or ready to go at any given moment, which makes impulsive spending decisions very easy to make. With Mvelopes I was able to uncover how much I overdid it in the eating out and takeout arena. For example, I had assumed ordering appetizers, despite the frequency in which I did it, wouldn’t hurt my finances too badly. Once I started tracking and understanding my spending, I was surprised by how much I was spending on those appetizers—and many other impulse purchases.

Learning how to effectively use a budget helped me develop an awareness that motivated me to make informed and wiser spending decisions. I still enjoy my appetizers, but not at a level that puts me in the red.

Do you think it helped you save money? Did it change anything else about how you manage money?

I log into Mvelopes on a daily basis to assign transactions and check my envelope balances. When I see an envelope’s funds depleted, I feel compelled to cut down on further spending in that category. I enjoy seeing money in my envelopes at the end of the month because it tells me I’m not living paycheck to paycheck and it gives me the opportunity to build on my savings. Over the course of a year I recovered about 15 percent in hidden spending and put that money toward paying down my debt and building my savings.

Can you explain how much it costs?

Depending on your choice of subscription plan (based on length of subscription), you end up paying anywhere from $7 to $14 per month.

Kimberly Palmer is the author of the new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.