How to Manage Your Money with Envelopes & Freedom Accounts



manage money envelope system freedom accounts

Are you serious about changing your money situation?

This is Part Three in a series of posts about managing your money better by creating a budget. If you have not read Part One and Part Two already, read them first, then come back.

So far, you decided to create a budget and researched your typical monthly expenses. Then you assigned each expense to a category and filed it under the type of expense it was; Fixed, Flexible or Irregular. Up next, you will learn to use envelopes and freedom accounts to help you decrease your spending and stress levels.

Setting up a budget takes time and effort upfront, but less to maintain once the initial work is complete. Choose a time when you can focus without too many distractions. Use pencil for everything because the numbers may change.

Here’s a brief example of what you should have by now. I won’t include everything. Yours will have different categories and amounts.

  • Fixed Expenses
    • Rent   700
    • Electric  75
    • Phone    70
    • Netflix  18
    • Car payment 300
  • Flexible Expenses
    • Groceries  300
    • Household supplies  100
    • Gasoline     200
    • Entertainment 200
  • Variable/Unpredictable Expenses
    • Clothes      75
    • Auto Maintenance  25
    • Medical  25

You are now ready to start using the two things that are going to completely change how you handle your money.

Envelopes & Freedom Accounts

I take a two prong approach to managing my flexible and irregular expenses with envelopes and freedom accounts.

Envelope System

The envelope system may be the quickest way to break your overspending habits.

I’ve been using envelopes for my flexible expenses for over ten years. I got started after reading Dave Ramsey’s The Total Money Makeover, which I highly recommend. It changed my life. I wouldn’t keep doing this if it didn’t work.

Using cash in envelopes has kept my combined food and household budget to under $450 a month for myself and two teenagers.  This includes their lunches during the school year as they both pack lunches every day as well as all other groceries, eating out and anything we buy at Walmart or other discount stores.  That could mean anything from furnace filters and garden supplies to pet food, toiletries and groceries.

Studies have shown people spend more when they use plastic, 12-18% more.

That really adds up!

You think about cash differently than plastic. Once cash is gone, it’s gone. If you go over budget when paying with a card, it seems like it doesn’t matter, it just gets added to the debt and you still have your card to keep buying.

If you only have fifty dollars in your envelope you pay attention to what you put in your cart or risk being embarrassed at the check out counter and having to put something back.

To use the envelope system you simply put the cash amount you have budgeted for your flexible expenses into envelopes and only pay for those items from them.  Label each envelope with the name of the category it is for.

No debit or credit cards. No debit cards either because they are plastic and therefore, you’ll probably overspend, then at the end of the month come up short for some other bill. Use mailing envelopes or the envelopes the bank gives you cash in.

If carrying cash in envelopes sounds too difficult for you then maybe you’re not ready to make a change. Just don’t complain to me when you don’t have any money.


Freedom Accounts

Freedom accounts are the second prong in my two prong approach. They are where you will budget for irregular expenses.

Freedom accounts decrease stress when unexpected expenses arise. Who wouldn’t want that?

I first learned about freedom accounts about ten years ago when I read The Complete Cheapskate: How to Get Out of Debt, Stay Out, and Break Free from Money Worries Forever by Mary Hunt. Freedom accounts are imaginary “accounts” on paper where you keep track of money set aside for irregular expenses. When an irregular expense comes up, you will have some, if not all the money needed available. You do not have actual separate bank accounts for each category of irregular expenses just a separate sheet of paper.  All of the money (which is not imaginary) can be kept in a single account.

How you track your deposits and withdrawals will be up to you, but you need to do it somehow. It may be a spreadsheet, an online money program like Mint or with pencil and paper. I do mine the old fashioned way

Freedom Account Page

Freedom Account Page

in a notebook with pencil and paper. It’s where I keep my entire written budget as well as freedom account records.  I’ve tried to use Mint, but it won’t sync with my accounts correctly. Online records can be out of sight, out of mind for me and I like tangible things like my notebook. I refer to it often.

It matters more that it is done, not what it looks like.

To set up a freedom account, at the top of the page write the category name, such as “Auto Repairs/Maintenance”. Then make columns for the Date, Description, In, Out and Balance.  In the corner I write how much money is budgeted to be deposited in the category each month. Each month, I add it to the balance.

When I need money from the account for an expense, I subtract it from the balance and take the amount of cash from the freedom account to pay for it. Hopefully, there is enough in the balance to pay for the expense. If there’s not, then I either don’t spend the money if that’s possible or get creative with how to pay for the rest.

Add the amounts you are depositing in each separate freedom account and set this money aside in some fashion. This could be a separate bank account you have easy access to or if you can handle keeping cash around without spending it on other things, you can keep it in a safe place at home.

The main rule is that you do not take money from the freedom accounts to pay for things other than what they are specified.  You don’t dip into the freedom accounts for a night on the town, (unless you’ve set up a “night on the town” account).

The beauty of the freedom accounts is the feeling you will have when something unexpected comes up and you actually have money set aside for just such a purpose.  It’s wonderful and eliminates stress.

Here are the categories I use in my freedom accounts.

  • Auto repairs/maintenance
  • Car tags & taxes
  • Clothing
  • Trash bill (pay quarterly)
  • Kids’ school
  • Home repairs/maintenance
  • Gifts
  • Pets (Veterinarian expenses, not pet food.)
  • Vacations (I would not have this account if I still had debt.)
  • Hair Cuts/Styling
  • Charitable Donations

It took me a year before I had all my freedom accounts figured out. The first year as things would come up, I’d think, “Oh, I need a freedom account for that.” and add one the next month. Then I’d see what money I could budget for it. I’ve had many more separate accounts for things needed at times, but these are the ones I currently use.

If you only have a few months until an annual payment is due, you would divide the total amount needed by the number of months left. Then after you’ve paid this year’s, you can divide the amount by twelve and your payments to your freedom account will go down.  The first year should be the only time this occurs unless you forget something.

Freedom accounts can change your life and eliminate stress.

If I want to go clothes shopping I take a look at my clothing account and see how much is in it, take the cash and go shopping.  I don’t have to worry about paying a bill later and I don’t risk overspending. It eliminates guilt because that money has been set aside for clothes.

I have a vacation account in my freedom account because it’s a priority for me. I budget for vacations and set aside money every month. This way, I can pay cash for them. If I had credit card or other debt, besides my house, I would not do that until those were paid off.

Ready to determine exactly what you can afford, start saving and reduce your stress?

Up next is the final step, How To Build a Zero Sum Budget pulling it all together and subtracting your expenses from your income to determine if it all works.

Will you have some leftover to save for that trip you want to take or need to make cuts?

You’ve worked hard to get this far, be proud of yourself.

The rewards will be great! 🙂

Have you ever used the envelope system?

Do you save for irregular expenses already and if so, how?  Let me know in the comments!

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