How to use the envelope budget system

If you’re considering creating a budget or revamping your existing one, there are a few different methods you could use. 

The envelope budget system is one way that could help you control spending and make more purposeful choices about your money. 

Key takeaways

  • Envelope budgeting is one way to manage variable expenses into categories using either physical or digital envelopes.
  • Once the money from a category is gone, you can’t spend again until you’ve added more money back.
  • Some may choose to take a digital approach to this budgeting style to avoid carrying cash. 
  • Envelope budgeting can help give you a more visual perspective of your spending habits.

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What is the envelope system?

Envelope budgeting is a budgeting system that focuses on discretionary spending—basically the money that’s left over after necessities and fixed expenses like rent are paid.

The system uses physical or digital envelopes to separate expenses into categories. Each category is assigned a set amount of money—more on how amounts are determined below. Once the cash in each envelope is gone, you’re done spending until more money is added, which is typically at the start of a new month or pay period. The idea is to split up your money according to how much you want to spend in each category—and then only let yourself spend until the cash in each envelope is gone.

Envelope budgeting works best for variable expenses, like groceries and dining out, which change slightly every month depending on your spending habits. These are the ideal types of expenses to include in envelope budgeting and make into spending categories.

Here are some categories that may be included when using this type of budget:

The envelope budget system can work well for those who like having a visual of how their money is being spent. And the good news is that this method can also be adjusted to work with online spreadsheets and other budgeting tools.

How does the envelope budget system work?

  1. Figure out your total monthly income from sources like your job, side hustles, investments, alimony or child support payments.
  2. Evaluate your current expenses and break them down into categories. Remember, the envelope system is usually focused on variable expenses, like groceries and gas, which change slightly every month.
  3. Once you’ve chosen which variable expenses to set aside money for, write each category name on its own envelope.
  4. Pick the dollar amount you want to allot to each category and write the amount on the envelope. If you’re unsure of how much to assign to a category, you could refer to bank statements from the past few months for a better idea of how much you spent in those categories.
  5. Once you get paid or receive money, take the funds out from your bank or an ATM. Divide up the cash and put the designated dollar amount in each envelope according to what you decided and wrote on each envelope before.
  6. Once all your cash is divided up, you’re ready to use the money from each envelope as needed. To make it easier to see how much you have left, you can consider writing down what you spent—or how much is left—on the back of the envelope every time you take money out. 
  7. When you’ve used all the money from an envelope, the idea is to avoid spending any more in that category until the envelope is replenished with more cash.
  8. You can dip into another envelope to cover an expense if needed. But if you’re repeatedly needing to do this, you may want to adjust your budget. 
  9. Money that’s left in any envelopes at the end of the pay period or month can be saved for next month or used to build an emergency fund, save for a trip or pay off debt.

Pros of using cash envelopes to budget

  • If you stick to the plan, it can be harder to overspend with this method since you’re only allowed to use the cash on hand.
  • Having a visual of your funds and how much you planned to spend in each category can help you stick to your budget.
  • Leftover cash can go toward savings or other financial goals.

Cons of using cash envelopes to budget 

  • It requires carrying cash.
  • Some people would rather use a credit or debit card to make purchases, in which case a digital system might be a better fit.
  • Separating expenses and dividing money can be tedious.

Using the envelope budget system with mobile banking

If you like the concept of envelope budgeting—but not necessarily the idea of using physical cash—you can modify this approach to a digital-based system. This can help avoid an ATM trip and alleviate some of the worry about carrying cash. 

One of the ways to use a digital approach is to use an app. Or you can create a spreadsheet yourself to keep track. You could make columns to serve as virtual envelopes that represent your monthly spending categories. And each time you make a purchase, adjust the amount in the column to reflect the new total. Then reset the columns when a new month begins.

Alternatives to the envelope budget system

The envelope budget system may not work for everyone. Here are some other ways to manage your money.

50/30/20 strategy

The 50/30/20 approach to budgeting groups expenses into three budget categories—needs, savings and wants. This method recommends setting 50% of your budget toward needs, 30% toward savings and 20% toward wants.

Zero-based budgeting

With the zero-based budgeting approach, you decide how you want to use every dollar of income. This means subtracting all your expenditures from your earned income. And any money that’s left over should be put toward a planned expense—like saving money, paying off credit card debt or investing—until you reach a $0 balance. In some cases, a credit card balance transfer may also be considered.

Pay-yourself-first approach

This type of reverse budgeting works by ensuring all your monthly obligations and savings goals are funded first—without taking on more debt. And then whatever is left over can be spent however you see fit.

Envelope budgeting in a nutshell

The envelope budget system can help you build better financial habits and make intentional choices about how you spend your money. If using physical cash isn’t the best option, a digital approach or a different type of budget might be better.

Of course, envelope budgeting isn’t the only way to work on your financial health. You can also learn some other money management tips to help you improve your finances.

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