DAVE SAYS … Cash Envelope System Keeps You From Overspending
February 27th, 2008 | by admin |From The City Paper: Nashville’s Daily Newspaper
Dear Dave,
I’ve listened to you for a little while now, but I was wondering about the envelope system you recommend. How does it work, and how much do you suggest saving for emergencies?
— Dale
Dear Dale,
The envelope system is simple. It’s just grandma’s old-fashioned, common sense way of budgeting money.
Back in the old days when people were paid in cash, they would take their money and divide it up in different envelopes. These envelopes represented the different categories in their budgets — food, clothes and whatever else they needed.
When a particular envelope was empty, they stopped buying that particular item because the money budgeted for the category was gone. So, if you wanted a shirt but the clothing envelope was empty, you didn’t buy the shirt that month.
It’s just a simple cash system that keeps you from overspending.
Today, we don’t use it that way for every single category, but it’s always a good idea to at least use it for food and clothing. These are two areas where most people tend to bust their budgets.
A fully funded emergency fund is three to six months of expenses. So, if your total monthly expenses are $2,000, you’d need between $6,000 and $12,000 in your emergency fund.
Think of it as your rainy day fund, Dale. You’ve heard the old saying, “Into every life a little rain must fall”? Well, the emergency fund is your umbrella and protection in these cases.
Trust me, if you live very long you’re going to have some rain in your life. And your emergency fund will keep you from getting soaked.
— Dave
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