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.
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.
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:
- 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.”
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|● How the Dave Ramsey Budget Works|
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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|
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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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms 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.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2021.
2 Important Disclosures for Earnest.
To 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.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
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3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for LendKey.
Refinancing 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 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
5 Important Disclosures for SoFi.
6 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.15%-4.42% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
7 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
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.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of January 4, 2021. Information and rates are subject to change without notice.
8 Important Disclosures for Nelnet.
Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.
Request for the cosigner to be released can be made by the borrower after 24 consecutive, on-time payments (not later than 15 days after the due date) of principal and interest have been made. Borrowers in deferment or forbearance must make 24 consecutive, on-time payments after re-entering repayment to qualify for the release. The borrower must be current on their payments at the time of the cosigner release request and show the ability to assume full responsibility of the loan(s) by meeting certain credit criteria on their own at the time of the request, including, but not limited to, being a U.S. citizen or having permanent residency in the United States, being the age of majority in their permanent state of residency, providing sufficient proof of income, and having no student loans in default.
Hardship forbearance allows you to temporarily suspend payments on your loan(s) while you are experiencing financial hardship. It is offered in increments of two or three months, with a maximum of 12 months available, in aggregate, over the life of the loan. If your loan(s) are in good standing at the time of your request, you will be eligible for forbearance in increments of two monthly payments. If, at the time of your initial request, your loan(s) are considered past-due, you will be eligible for forbearance in increments of three monthly payments. Future increments of forbearance, up to a life-time maximum of 12 months, may be requested upon the completion of making a certain number of principal and interest payments. During the two- or three-month forbearance period, you will not be required to make payments; however, any unpaid interest will continue to accrue and will be capitalized (added) onto your principal balance at the end of the forbearance period. You may continue making payments in any amount without penalty during the forbearance period. Your loan repayment term will be extended by the number of months in the forbearance period.
Refinance Loan Eligibility: You must be a U.S. citizen or permanent resident alien with a valid U.S. Social Security number, and be the legal age to enter into binding contracts in your permanent state/territory of residency, or be at least 17 years of age and apply with a cosigner who is at least the age of majority in their state/territory. Non-residents can apply with an eligible cosigner who is a U.S. citizen or permanent resident alien with a valid U.S. Social Security number. The student loans you refinance must be in their grace or repayment period, and you can no longer be enrolled in school on a half-time or more basis. You must have at least $5,000 in student loans to refinance. You, or your eligible cosigner, must have an annual income of at least $36,000. Approval subject to credit review. Other credit criteria may apply.
Refinance Loan Limits:
Loan Refinancing Risks: Federal student loans include benefits that may not be offered with private student loans. Carefully review any potential benefits that may be lost by refinancing federal and private education loans, such as the loss of any remaining grace periods. To learn more about what to take into consideration when refinancing federal student loans with private education loans, click here
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Fixed interest rates range from 2.99% APR (with auto debit discount) to 6.25% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. The fixed interest rate will remain the same for the life of the loan.
Variable interest rates range from 2.00% APR (with auto debit discount) to 5.63% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. Variable rates may increase after consummation. The variable interest rate is equal to the One-Month London Interbank Offered Rate (“One-Month LIBOR”) plus a margin. The One-Month LIBOR in effect for each monthly period (from the first day of the month through and including the last day of the same month) will be the highest One-Month LIBOR published in The Wall Street Journal “Money Rates” table on the twenty-fifth (25th) day (or if such day is not a business day, the next business day thereafter) of the month immediately preceding such calendar month. The Annual Percentage Rate (APR) for a variable interest rate loan will change monthly on the first day of each month if the One-Month LIBOR index changes. This may result in higher monthly payments. The current One-Month LIBOR index is 0.15% as of 5/4/2021.
The lowest interest rate for each loan type requires automatically withdrawn (“auto debit”) payments, a five-year repayment term, and the borrower making immediate principal and interest payments. Not all borrowers will receive the lowest rate. The interest rate and Annual Percentage Rate (APR) may be higher depending upon (1) the credit history of the borrower and, if applicable, the cosigner, (2) the repayment option and loan term selected, (3) the loan type selected, and (4) the highest level of education attained. If approved, applicants will be notified of the rate qualified for within the stated range.
*Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score. **Your actual savings may vary based on interest rates, outstanding balances, remaining repayment terms, and other factors.