This story was originally published on Oct. 13, 2017.
The envelope method espoused by personal finance expert Dave Ramsey is a useful strategy for beginning budgeters, including student loan borrowers looking to maximize their cash flow. It’s more attractive than other strategies because it requires you to physically handle your expenses – by categorizing them with cash-filled envelopes.
That’s what drew Scott Grierson and his wife Luby to the Dave Ramsey envelope system.
“It has a name, it has a purpose,” said Scott, a self-employed tutor and teacher. “If your money doesn’t have a purpose, it’s easy to spend it on a whim.”
In four years of employing the envelope method, the Griersons accomplished the following:
Paid $5,800 of school tuition and expenses without resorting to student loans
Built a $15,000 emergency fund
Saved $6,000 in cash
Invested in four mutual funds to save for a future home down payment
Let’s review how the Griersons got started with the envelope method, how they broke some of Ramsey’s rules for their benefit – and how you can get started with this budgeting strategy.
The envelope method: How the Griersons got started
After Luby listened to a side-hustle podcast describing the envelope method, she told her husband about it. Having never budgeted, Scott knew his days of running up a tab at the bar were numbered.
Following the envelope method’s formula, they estimated their weekly spending on groceries, bills and nonessentials like new clothes. They lumped those latter categories into one envelope called entertainment. Then they earmarked $100 for groceries and $350 for entertainment.
“The system is supposed to make you mindful of your spending money,” Scott said. “I think we had too much money to be mindful of it. It was, ‘We still have $100, I should buy this!’”
Little by little, the Griersons readjusted the amounts to ensure they weren’t giving themselves too little or too much to spend each week. When money remains at the end of a week, it goes into savings instead of fattening the envelope. The envelope is then refilled with new income.
The small weekly savings helps to fund big goals. The couple saved $5,000 this way in 2016 before hitting the pause button on a savings goal for 2017: They welcomed their daughter into the world earlier that year.
4 ways the Griersons improved the Dave Ramsey envelope system
Even with planning a baby budget, having a child and a fluctuating income forced Scott and Luby to edit the envelope method for their use.
The Griersons broke a Ramsey rule by creating one entertainment envelope instead of dedicating envelopes to all the smaller nonessentials, like:
Clothing
Technology
Dining out
“We thought it was overwhelming the way [it was] designed, so we simplified to make it work for us,” Scott said.
Here are four more ways they make the Dave Ramsey envelope system work best for them.
1. Shift money between envelopes
The envelope method stresses the importance of keeping each envelope separate from the others. You’re not being disciplined enough to limit your spending on clothing, for example, if you need to borrow from your restaurants’ envelope. It’s like robbing Peter to pay Paul, the thinking goes.
At least once a month, however, Scott said he and his wife run out of grocery money while the entertainment envelope is bursting at the seams. But they don’t feel bad about borrowing from entertainment to buy more food.
“But we never use grocery money to buy shoes,” Scott said.
Becoming parents has also naturally adjusted their spending. They used to spend $40 to $50 at the bar after playing volleyball with their friends. Not anymore.
“A beer becomes a onesie,” Scott said. “You just can’t do as much [as parents], so it’s easier to not spend money.”
2. Hold weekly, monthly meetings
The Dave Ramsey envelope system advises its users to call emergency money meetings with your significant other when spending over budget. The Griersons decided they’d hold 10-minute weekly meetings to discuss everyday spending as well as longer monthly conversations to focus on savings goals.
Agenda items have included:
Skipping a dinner out during a week that they buy $70 worth of baby formula.
Annual goal of saving $2,000 for their Christmas and New Year’s plans: “We treat every upcoming expense as debt,” Scott said. “We’re always paying off everything before we spend it. That way, we live within our means.”
Current goals to replenish a
five-month emergency fund that was depleted, in part, by an unforeseen trip to visit family.
They also always talk before shelling out $100 or more for an expense.
Communication is key. Scott said the system only works because he and his wife both believe in it.
“I don’t think we’ve had a money argument in four years of doing this,” he said. “It brings a sense of calm and peace to you because you no longer have to worry.”
3. Fill envelopes with inconsistent income
The envelope method was built for salaried professionals like Luby, a physical therapist assistant. She earns the same amount of money with each paycheck.
Scott, on the other hand, runs a small mostly-cash business, tutoring children in their homes and giving math tutorials through his YouTube channel. During the summer months, he might only earn $200 to $500 in a given week. In the fall, he could bring in anywhere between $800 and $1,200.
“My money is so scattered that if I didn’t have a plan, we’d be screwed,” Scott said.
Fearful of taking on debt, planning allows Scott to spread his volatile earnings over a year. He uses his cash to fund the envelopes and contribute to big savings goals. Luby, meanwhile, takes care of the apartment rent and monthly bills with her consistent paycheck.
As a private contractor, Scott also uses the envelope method to create a separate savings goal: having the money on hand to pay his freelancer taxes come April.
4. Add credit cards to the mix
Believing that credit cards inspire consumers to make unnecessary purchases, the Dave Ramsey envelope system leaves no room for the plastic presently in your wallet. Scott, who earns much of his tutoring income in cash, agreed.
“Let’s say your clothes budget is up to $300,” he said. “You can go to Amazon.com and buy $300 of clothes in one click. There was no resistance to spending the money. But if I go to Old Navy and physically pull $300 out of my pocket, it’ll make me think twice about what I’m buying.”
So why does the Grierson household have four credit cards? To build the credit needed to buy a home.
Two years ago, Scott couldn’t even qualify for a credit card. Luby made him an authorized user on her cards. After making timely payments on the couple’s cable, electric and gas bills, credit card offers started arriving in the mail.
In 18 months, Scott said he increased his credit score from 640 to 758, besting Luby’s. And two months ago, the couple was preapproved for a home mortgage.
Not letting the envelope method get in the way of a good time
Scott knows what you’re thinking. No, he and his wife aren’t hermits. Since using the envelope system, they have…
Vacationed to Europe twice
Spent a month in Florida, where they married
Paid for about half of their $25,000 wedding
Footed the bill for having their first child
And, no, you don’t have to be a math teacher like Scott to make this work. The whole thing was actually Luby’s idea in the beginning.
“I certainly enjoy looking at the numbers, and that makes the system appealing to me,” said Scott. “But whether you’re a math teacher or not, you have to be able to handle your finances, right?”
4 pros of the envelope method
4 cons of the envelope method
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Your finances feel more organized, particularly if your household has two incomes.
You’re more likely to pay your bills on time – and be disciplined about unnecessary spending.
You’ll avoid overdraft fees on your checking account and unnecessary credit card debt.
It’s nice to have cash on hand in case of emergencies.
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Your whole family might not be on board, and getting started can feel like a lot of busy work.
Accounting for variable expenses can feel like guesswork.
You’ll have to go through the machinations of cashing your paycheck or visiting the ATM to physically fill the envelopes.
You’ll miss out on credit card rewards.
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How to create your own version of the Dave Ramsey envelope system
Consider creating a budget or an alternative strategy or tool to monitor finances. You might begin by building a $1,000 emergency fund, as the Griersons in 2013.
From there, figure out how much you spend on groceries and everything else. Scott recommended tracking your spending for two weeks and then dividing by two to find your weekly average in each category.
Then zero in on where you can make cuts.
“For us, it’s going out Friday night, not going out Tuesday night, Friday night and Saturday night,” Scott said. “That’s because if you’re doing this system, you probably have some kind of financial goal, whether it’s getting out of debt or buying a house or whatever it is.
“If that goal is important to you, you’ve got to be willing to make a sacrifice.”
Don’t worry about the smaller details of the Dave Ramsey envelope system. If you never use cash, for example, use the debit card in your wallet and a spreadsheet on your computer.
Edit the envelope method to your benefit, and you can accomplish your aims, whether to pay down debt or save up.
Steps to get started with the envelope method
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Track your spending and income, perhaps using a budgeting app.
Create spending categories and limits that cater to your financial goals.
Label your envelopes and fill with cash from your paycheck.
Access the envelope each time you have an expense.
Stop spending once the envelope is empty.
Move leftover money in the envelope toward your financial goals.
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Splash Financial DisclosuresTerms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
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Earnest DisclosuresTo qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
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Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
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After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
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4 .
SoFi Disclosures
Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
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LendKey DisclosuresRefinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 12/07/2020 student loan refinancing rates range from 1.99% to 8.56% Variable APR with AutoPay and 2.95% to 8.77% Fixed APR with AutoPay.
The post How to Use Dave Ramsey’s Envelope Method to Benefit Your Finances appeared first on Student Loan Hero.
