To combat overspending and “gamify” the money-saving process just a bit, you may want to go “old school” and try to save money with the envelope challenge. Long before the iPhone, finance apps, the Ipad, and even before (gasp!) the Internet, our grandparents came up with some pretty powerful ways to set money aside. More and more people are starting to realize that their savings strategy just isn't working. Worse still, some are just waking up to the fact that they might not even have a strategy at all.
Some modern financial pundits have uncovered this proven savings system and have renamed it the “envelope savings system.” A 100-envelope challenge recently went viral on TikTok with promises to help people save $5,000 in as many days, but I like a different type of envelope challenge (one that people do monthly for a number of months) because it can help curb overspending, pay off debt, or help people save up for a home.
How to Save Money with an Envelope Challenge
How does the envelope challenge work?
The heart of this system involves putting cash into envelopes you label for specific bills. You use the money in the envelopes to pay bills or spend freely, but once it is gone — the money is gone.
It is certainly true that using cash may sound quaint and more trouble than it’s worth. However, keep reading and you will soon understand the hidden power of this system.
But let's say you like to pay bills by automating your bill pay so that's covered. Then you'd want to do an envelope challenge just for your discretionary spending.
The point of using a real envelope is that the envelope serves as the complete budget for that expense each month. (If you need help with figuring out what your budget is or should be, check out our favorite books on budgeting.)
For example, suppose you set up an envelope labeled dining out. Knowing that you and your significant other like to dine out on Friday nights, you decide to budget $75 per week for dining out. That means you put in $75 times 4 or $300 into the envelope labeled dining out.
Now here is the key point: when the money in the dining out envelope is gone, so is your dining out for that month.
This envelope savings system really serves as a NO PAIN budgeting system. Note this is definitely not at all like the coaching from the personal trainers who constantly remind you that “no pain no gain.”
Nope, none of that kind of stuff here. The envelope system really is a painless way to set aside money for the expenses you know you will have as well as the things you want. In other words, no pain equals your gain.
How do I set up an envelope challenge?
Setting up your personal envelope system only requires only a little bit of effort on your part. First, take a look at your monthly expenses. For most people, the best strategy is to separate your expenses into two broad categories.
Create a budget
Call these two categories: Fixed Expenses and Variable Expenses (like we mentioned above.) Your fixed expenses are exactly what they sound like, and they include bills such as your monthly rent or mortgage payment, your car insurance, car payments, and other expenses like those. (Here's how to trim your bills by negotiating with vendors, here.)
Your variable expenses are those expenses that seem to go up and down every month. These would be categories such as groceries, dining out, clothing, etc.
Grab cash and divide
Now you have divided your expenses into fixed or variable categories. Next, it’s time to work the system. The fixed expenses are best to pay with auto-pay (Here are apps that can help you manage your money. Our favorite is Rocket Money.) Total up all of your fixed expenses and make sure you keep that amount in your bank account.
The remainder of the money comes home with you, in cash. Analog, I know. But then, at this point, you want to carefully divvy up your cash into all of your envelopes. There are two things to keep in mind when you are stuffing your envelopes. Make sure you have an entertainment envelope. Also, in the beginning, you are probably better off if you include an envelope you label “Safety Net”. (It's better if you already have an emergency fund in place because the Safety Net envelope is only there should you find that your underestimated one of your variable expenses. I.e. when you're doing the envelope challenge and you have an oops.)
Actually save money with the challenge by following this one rule
The key (The only key, really) to the envelope system is that you never ever “rob” one envelope to pay an expense from another. The only exception to this rule is using money put into the Safety Net as you set up and fine-tune your system in the first few weeks or months. The problem areas are most likely to show up in the dining out or the entertainment envelopes.
But the power of this system is that allows you to see where you are overspending very quickly and in a very tangible way. If you get to the middle of the month and your dining-out envelope is empty, that should tell you something.
Either you set aside an inadequate amount, or you are spending more than you think you are.
You see, the envelope challenge works because it plays upon age-old-yet-power psychology. The experience of using physical cash triggers a different psychological reaction inside of you that you may not even be consciously aware of. Unlike whipping out your credit card and blissfully signing the credit card slip using cash triggers a different part of your brain.
This envelope challenge (no pain budget) system really works…if you play along and follow the rules as outlined above. This system allows you to take control of your spending, and you may well find yourself with more money left over at the end of the year. You can also try another 365-day money-saving challenge, here.
This post was written by Lauren Bowling, with help from Jim Gibson, a freelance writer who writes for Your Finances Simplified.
Lauren Bowling is the creator of Financial Best Life. Writing about money since 2012 (formerly as L Bee and the Money Tree), Bowling is an award-winning blogger and money and real estate expert whose advice has been featured on CNBC, Forbes, CNNMoney, Elite Daily, Business Insider, Redbook, and Woman’s Day Magazine and more. After selling the site to a division of The Motley Fool in 2019, Bowling is now back as the owner and primary voice behind FBL and is excited to continue educating elder millennials everywhere about how to afford their best life.