Have extra cash? Put it in an envelope. In fact, put it in several.
That’s how “Broke Millennial” author Erin Lowry saved $500 in a year on a $25,000 salary. The theater major moved to New York City in her early 20s after landing a job as a page on the David Letterman Show. The aspiring actress’ job was to entertain the audience before the show started. It was fun, she said, but paid little.
“I had a vision of a starving artist and it’s almost this romanticized thing that kids do in college,” Lowry told NBC BETTER. But Lowry soon realized her paycheck wasn’t nearly enough to cover the $950 a month she owed in rent. To make up the difference, she picked up extra work as a Starbucks barista and babysitter, often working all three jobs in revolving shifts in a single day.
“It was a pretty tiring time in my life,” said Lowry. But she was determined to make it work and save money in the process.
The ‘Envelope System’
Lowry got paid in cash whenever she babysat, and got tips working at Starbucks. Instead of putting the money in a bank account, she deposited into envelopes. She split her budget into four categories and marked an envelope for each:
- Money for Anna (Lowry’s roommate, who paid the utilities)
- Fun Fund
“Every time I came home from either of those jobs, I would usually put 50 percent into ‘rent,’ 25 percent into ‘money for Anna,’ and then 25 percent into ‘savings,’” she said. Extra cash would go into the “fun fund” envelope, which she joked was “usually pretty empty.”
Envelopes: A Visual Way to Save
The 27-year-old said the envelope system is effective because you can see how much money you have in each of your budgets.
“I think it’s incredibly helpful to look into your rent envelope and see, ‘Hey, it’s half way through the month, but I still need $300,’” she said. “Or to look into your savings envelope and think, ‘Wow, in the last three months I’ve saved $200.’ Especially when you’re in a stage in your life where every penny counts.”
Staying On Track
I think it’s incredibly helpful to look into your rent envelope and see, ‘Hey, it’s half way through the month, but I still need $300.’
The system keeps you focused on your budgets and prevents you from overspending, according Lowry.
“If you’re doing it the right way, it should be getting funded more towards the beginning of the month,” Lowry said. “You’re saying, ‘OK this is May 1 and this month I have $300 to be spending on groceries so that by the time you get to May 25, if you only have $30 left, that’s all you have left to spend.”
She said it also helps prioritize your budget “especially if you’re trying to get your financial life together.”
“I think it helps illuminate that what you thought were your priorities aren’t based on how you’ve been spending your money and it can help you redirect and refocus,” Lowry said.
How to Use the Envelope System with Online Banking
Now a full time author, blogger, and public speaker, Lowry no longer gets paid in cash. She said she still uses the same system, but with multiple checking and savings accounts in place of envelopes.
“It’s the exact same system, just digital,” she explained, noting that many banks will allow you to open multiple accounts. You can automate contributions from your paycheck to a savings account, which makes saving easy, according to the the blogger.
“When I’m logging into my checking, which I do a little more frequently than savings, I’m not seeing my savings there, so I’m not tempted to pull money out,” Lowry said.
Don't Be Too Stingy
While Lowry achieved her financial goals, there is one thing she regrets: not putting enough in her “fun fund.”
“I’m thankful I had that experience, but I’m also now trying to be a little bit better about finding balance in my life and saying yes sometimes and not solely always focusing on making money,” Lowry concluded.