Before we can even talk about starting to set up a budget, we need to first imagine that credit cards do not exist. Why? Because credit is the bane of every heavy spender’s existence. Credit cards give you the ability (and the excuse) to spend money you don’t actually have. Credit can get you in a lot of trouble, without you even knowing it.

What we need to do is to close our eyes and travel back to a time when credit cards did not exist. Travel even further back than checks and balances. We need to pretend like our money is entirely physical. Pretend that you live at a time when there were only dollar bills and coins, and that you got paid in such. By pretending that every single dollar that comes your way is tangible, we are able to have control over the money we spend, because if there is no physical money to spend, then there is nothing to control.

So let’s say you get paid today. Your pay comes to you in dollar bills and coins (ick! I know). What are you supposed to do with that money in order to proactively budget during a time when budgeting tools did not exist? You place them in envelopes, each titled a certain category. And this is how we create an envelope system for budgeting.

The envelope system uses the metaphorical imagery of envelopes to define a categorization that needs to take place. Let’s say you have physical envelopes that represent different categories. Every time you receive your paycheck in cash, you would allocate your dollars towards certain things and you would put those dollars into their appropriate envelopes. For example, money designated for groceries will go into the envelope labeled “Groceries”. Money also needs to be set aside for rent, so you definitely want to take some of your paycheck and place money in the envelope titled “Rent”. And so on and so forth, you would put away your dollars until every single dollar is accounted for inside an envelope. If you were like most people, I would bet that you would take a majority of your income and place the dollars into envelopes that ensure your survival first, such as housing, food, and health. This is something we don’t really think about now that there is a large amount of imaginary dollars that we can always fall back on (aka credit).

Now, whenever you want to buy something, you need to physically pull out the dollars that you will pay with from the designated envelopes. When you go to the grocery store, you will need to pull out money from the “Groceries” envelope. As you can quickly see from this example, this system makes it impossible to ever over-draft. When money is made physical, you are forced to spend less than you earn. If you are sitting at the check-out line and the cashier asks for $20 when you only have $15 in the envelope, your only option is to remove something from the cart in order to make your bill equal to $15. Or, if you happen to carry all your envelopes with you wherever you go, you have the option of taking money out of a different envelope and putting that into groceries. Say you cover the $5 by taking it out of your envelope labeled “Dining Out”. Now, your decision to buy more in groceries affects your ability to dine out.

Unfortunately, millions of Americans do not think in this manner. “Just charge it to the card and worry about it later,” is a common mantra. But in order to master the budget, you can’t allow yourself this flexibility. You need to set boundaries, as if there were physical boundaries to spending. Do this, and you will never over spend a day in your life.

A quick note on credit cards: I am not saying “get rid of credit cards all-together”. There are plenty of times when credit cards are very useful! But for the sake of this portion of the course, let’s just talk about setting up a budget in terms of the envelope system, as if credit cards did not exist.