Advice from Nashville's leading Financial Aid Advisor Dave Ramsey
By Dave Ramsey
Financial Peace and
The Total Money Makeover
"What is the envelope system?"
How does the envelope system work? Also, how much money do you recommend to save for emergencies?
Dale via email
The envelope system is grandma’s old-fashioned way of budgeting money. Back in the old days when people were paid in cash, they would take the money and divide it up in different envelopes according to the categories in their budget – food, clothing, gas – and whatever else they needed. When a particular envelope started getting close to empty, they stopped buying because the money budgeted for that category was gone. If you wanted a shirt, but the clothing envelope was empty, you didn’t buy the shirt. It’s a very simple cash system that keeps you from overspending.
Today we don’t use it that way for every category, we just use it for a few – food or clothing, for instance. These are two areas where we tend to bust the budget, so use this cash method as the only source of paying for these areas so you don’t overspend the category and blow the budget. Of course, for other areas you would continue to use checks or electronic draft.
A fully-funded emergency fund is three to six months of expenses. Think of it as your rainy day fund. Trust me, if you live very long you’re going to have some rain in your life, financially speaking. The emergency fund is your umbrella, your protection in these cases – a way to prevent you from getting soaked.