How We Paid Over $100K of Debt With This Simple System

If you are anything like me you love to pay off debt. Anytime I can make an extra principal only payment toward our debt, I am like a little girl at her birthday party. We paid over $100K of debt with this simple system and you can too! It’s called the envelope system and my husband and I love it. It’s the only way we can really keep our cost down and drive down our debt. Now that I am staying at home with our children, money is tighter than it’s ever been. Thankfully, this blog (see Everything You Need to Build and Grow Your Blog if you are interested in paying off debt with blogging) and the envelope system has been a HUGE help to put some money each month toward our goal of paying off debt. Don’t worry, if you have no clue what I am talking about, I will walk you through step by step on how to pay off debt with the envelope system and hopefully your debt payoff goal will become reality as well! So….let’s get to it!

Step 1: Itemize Last Three Months Expenses

First things first. You have to get a handle on how much you are spending each month and what you are spending your money on. I can guarantee if you have never taken the time to go through this, you are already spending more than you really have to, even if you think you are being frugal. Most people spend more than they realize they are spending just because they don’t keep track of it. For example, if you love going out to eat, I bet you go out more often than you think. When I first sat down and went through our expenses I could not believe the number of times my husband and I had spent on eating outside of the house the few months prior. Still don’t believe me? Write down the number of times you think you’ve went out to eat, bought a snack, or bought a drink from the gas station when pumping gas over the last month and just hang on to that number for now. If you want to go a little further than that, write down how much you think you spent as well.

Okay, so now you need to add up what you’ve spent each month for the past three months. You need to itemize this as much as possible. So instead of lumping your electricity, water, etc. into a group called utilities, you need to actually list them out separately. This is so you will be able to see where you are spending your money and be able to look for any cost efficient alternatives. Once you get your monthly sums of each category, you need to average it over the last three months. Take the sum of Month 1: Category 1, Month 2: Category 1, and Month 3: Category 1 (let’s say gas) and divide it by three. This will let you know how much, on average, you are spending in each category.

If you are anything like me, you want this to be as easy and painless as possible. So to make easier, I created a Budget and Allocation Calculator so all the legwork is done for you. All you have to do is type in your numbers 🙂 . How cool is that!!

Oh and once you have finished this step, take a look at how many times and how much you have spent on eating out over the last three months. Whoa! I know it adds up quickly!!

Step 2: Itemize Last Three Months Income

This one is pretty easy. Some of you may have one income and some may have several different avenues of income. You need to list these out separately but in the end add them up. Your income should be pretty consistent each of these three months. If it is not, you should take out any extra income that you will not regularly make. You do not need to inflate your income because it will not give us a real number to work with. There is no reason to average this. We are just looking to make sure your income is consistent across all three months.

Step 3: Compare Income and Expenses

Now that you have your expense and income list, you need to compare them to make sure what you are spending is less than what you are bringing in each month. If your expenses are higher than your income, you have a BIG problem! If this is the case, then your eyes should be wide open and you should be seeking ways to dig yourself out. Fortunately, you’re on the right track. Doing what you are doing right now is the first step, so well done! You have a tall mountain to climb here and it will get difficult, but believe me when I say – It is possible and so worth it! Don’t let this stop you. If anything, turn that hopeless or defeated feeling into determination and grit!

If your expenses are not more than your income, great job! It will be easier for you to pay off debt, save money or spend less when you are starting with your feet on the ground.

Step 4: Go Over Expenses with a Fine Tooth Comb

This step will help you understand where your money is being spent and where you can save. You need to take some time to go through this. Maybe even process it for a day or two. I have found that when you initially do this step, there is always some sort of denial that comes with it. Some think their spending habits are okay. Others think they are doing everything they can do and there is no way to squeeze a little extra cash. But…..there usually is.

Another really good idea is to let someone else look at it. Maybe a spouse, child (at an appropriate age and maturity level), or close friend. It is easier for people to see a flaw in other’s buying habits than it is their own. So if you’re having a hard time with it, try this. If you do not have someone you trust or are comfortable with sharing this information, I’ll be happy to take a look. Just shoot it to me in an email :-).

I want to give you an example of looking at each of your categories with a fine tooth comb. Let’s take a look at your gas expense. It’s easy to say you have to spend the money to drive to and from work or take the kids to practice. I want you to really look at it and answer these questions:

Where do we drive every day?
Is it necessary to drive to these places?
Would it be possible to combine trips?
Can we carpool with each other or with others?

There are several other questions you may want to ask yourself here, the above is just an example. The thought process you should develop when answering is (this is one day, each week for a month):

Husband: drives to work, drives to get lunch and back to work, drives home, drives son to practice. Wife: drives to school to drop kids off and back home, drive to get groceries and back home, drives to get haircut and back home, drives to visit with a friend and back home, drives to pick up kids from school and back home, drives daughter to dance class.
Wife can cut down on trip cost by asking the friend to her house or possibly making the visit once a month instead of once a week. Instead of going grocery shopping once a week, combine two trips in one and shop every other week. Husband should take his lunch instead of having to drive somewhere to buy it.
Possibly. A few ideas: husband drops kids off at school on his way to work, wife plans hair cut in enough time to go straight from beauty shop to the school, plan to pick up groceries after school pickup and drop daughter off at dance class on the way home. Dad picks up daughter from dance class on his way home from son’s practice. Of course, there are a few things that will come into play that will not allow for this such as location and timing. That’s ok, just do the best you can here.
Possibly. Husband could ride with a co-worker to work a few days. Wife could team up with another mom from school and carpool the kids.

Some of the answers may not be ideal and some of you might not be willing to do this. But remember, the only way to finally reach financial freedom is to be determined and humble yourself enough to think and walk outside of your comfort box!

Step 5: Go Over Income with a Fine Tooth Comb

This one is simple as well. Take a look at your income to see how much you can spend each month. If you have more expenses than you do income or are just barely able to pay what expenses you have, then I suggest you make more money! If you are happy with your income to expenses ratio, then great! Move forward to Step 6!

Now I am sure you think you are making the most money you possibly can. But are you really? Have you received a raise within the last year? Is your salary the same or above what the average is for your position? Can you make more with the experience or degree you have? Have you looked at a part-time job? Have you looked at how to make money on the side? If you are saying “no” to most of these questions, then the answer is more than likely you are not making as much as you really can.

I realize there is this thing called work-life balance and I am a strong believer in it. That’s one reason (not the only reason) I started this blog. There has to be more in life than working, right? But I have always said if you do have to work, you might as well make as much as you can and enjoy it.

In order to pay off your debt and save money you need to look at your income and find ways (I suggest more than one) to increase it. Ask for a raise, look for a better paying job, get a second part-time job, start a blog, start side hustling, sell everything you can in your house that is sitting around, do anything that will bring in extra income. See my list of ways to make extra money at the end of this post.

Step 6: Allocate Money for Each Category

Now that you have a pretty good idea of what your expenses look like here comes the hard part. Take what you have learned from Step 4 and set a goal for each category on what you feel is necessary and feasible. I like to break it down per pay period in this step so it is easier to know exactly how much can be spent every time we are paid. You can do it per month or per pay period but I suggest you do not go any longer than one month. So for example: I feel we will need to allow ourselves (between 3 vehicles) $400 per month for gas. We get paid bi-monthly so we would allow ourselves $200 each pay period for gas.

THIS IS THE BIGGY! Make sure at the end of this step, you have not allowed yourselves more than what your income is. The greatest part about using the envelope system is you are using cash to pay for everything. If you do not have enough cash to pay for everything, then something has to go!

Step 7: Create Your Envelopes

For this step, you need to come up with the easiest way to have cash on hand in each category. Even though it’s called the envelope system it doesn’t really matter what you use. You can use envelopes, page protectors, a small expandable binder with file pockets, or anything else you can think of that will hold money. List the name of each category on each of the envelopes, page protector, or file pocket. So for me I wrote Gas $200 on one envelope, Groceries $150 on another envelope, Hair $14 on another, and so on.

Each pay period you should cash your paycheck or withdraw the amount you need to cover all the necessary cash for these envelopes. If there is any money left over, put it in savings or pay off some debt. I do recommend having a nice cushion in your savings account for emergencies. By emergencies, I mean your husband or wife losing their job, you get a nail in your tire and have to buy a new one, or something of that nature. I do not mean an oil change or new tires due to wear and tear. This expense should be covered in your monthly expenses.

Okay back to extra money. If you do happen to have money left over each pay period that is not needed to cover bills, you have money in your savings account to pay emergencies, and you have debt; I suggest you pay the extra money toward the debt. The reason being is because if you do not spend it now to pay off debt, you will justify why it should be spent in the future. Usually this justification is something of unimportance like a new video game, manicure, gun, or whatever it is that you enjoy.

Don’t forget! If you haven’t already, make sure to download the Budget & Allocation Calculator!

Ahhhh…..finally! You have now created your very own Cash Envelope System! I bet you thought we would never get here. If you’ve made it this far, congratulations! You have succeeded in the first big hurdle. There are still many to go but this is such an accomplishment. Give yourself a pat on the back, you deserve it!

Now that you are on your way to paying off debt, saving money, or spending less with the envelope system, don’t stop here. Continue to go through these steps each month in the beginning. You can cut back to every three or six months once you get the hang of it and feel you are spending only what you need to. You want to make sure you did not over allow or under allow yourselves in each category. Also, once you start you may think of other ways to decrease your need in certain categories or find ways to bring in more income. It is a never ending cycle!

I’m sure you have heard of Dave Ramsey by now. He is what made us decide to start the envelope system. He has a great system of not only paying off debt, but completely revamping your finances. If you haven’t already read The Total Money Makeover A Proven Plan for Financial Fitness, I highly recommend it!