Envelope Budgeting Method: Get Your Finances on Track
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With so many budgeting styles, it can be hard to find the method that’s right for you. Fortunately, the envelope budgeting method is a straightforward way to curb your spending and save money—regardless of your income and long-term financial goals. Also known as the cash envelope system (or just the envelope system), this budgeting style allows you to control where your money goes by assigning categories or envelopes for each type of expense.
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What is the envelope budgeting method?
The envelope budgeting method is an easy way to take control of your finances and a relatively simple style of budgeting that anyone can try. Based on a system of spending categories using physical envelopes, this budgeting method requires you to set a balance on how much you’d like to spend in each category and then place that amount of cash in its designated envelope. As a side note — don’t worry too much if you’re more of a credit card or debit card type, as the envelope system can still be achieved electronically using a budgeting app.
As far as the budget categories themselves, these might include things like groceries, rent, gas, clothes, coffee, and even entertainment — for things like buying online games or going to the movies. The idea behind this budgeting strategy is that once an envelope is empty, the budget for that spending category is done until your next pay period. Each time you get paid, you’ll divide your income into your separate envelopes, which will be your set budget until the next paycheck. Not only is this budgeting method a great way to gain more visibility into how you’re spending money, but it also allows you to set some ground rules and avoid overspending in any category.
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Rules for the envelope budgeting method
To get the most out of the envelope budgeting system, you’ll want to follow a few ground rules. Here are the main ones to consider.
Log your monthly income and expenses
This is an important rule for this style of budgeting, as well as a good starting point for anyone who’s curious to try it out. By understanding your income and monthly expenses, you’ll be better able to set up your spending categories and decide on an appropriate spending limit for each one.
Set your categories of spending (and amounts) upfront
To succeed in this budgeting style, you’ll want to set up your categories of spending (and their limits) upfront, as in, right after you get paid. This is because you’ll have established limits at the outset, which will make following those limits that much easier. Don’t wait until you’re at a store to decide how much you want to spend. Set your limits in advance and plan on sticking to them.
Create categories that will help you reach personal finance goals
To get the most out of the envelope system, you’ll want to create meaningful categories of spending that can help you reach your personal finance goals. Once the essential spending categories are accounted for (like your rent and gas money) start thinking about what else you’d like to be saving for. Maybe you want to create a travel fund, set up a new checking account, or even save up for a new car or a downpayment on your house. Whatever your goals, make sure to factor them in when creating your budget categories.
Stick to your envelope budgets
Again, for this budgeting method to work, you’ll need to stick to your spending categories and their associated limits, no matter what temptations come along. This might mean saving up across multiple pay periods to afford something. It also means avoiding the temptation to tap into your grocery fund to buy an iced coffee. Remember, your budget is finite— and money that’s moved out of its category will only make it more likely that you cannot afford something you need or want at the end of the month.
Envelope budgeting example
Let’s say you make $3,000 every month. Assuming you get paid twice a month, you’ll have $1,500 per pay period to divide into your envelopes. Here’s an example of what that might look like.
Pay Period #1 | Pay Period #2 |
Total Income: $1,500 | Total Income: $1,500 |
Rent $700 | Car insurance $100 |
Utilities $50 | Retirement $300 |
Phone bill $80 | CClothes $100 |
Groceries $100 | Groceries $100 |
Gas $70 | Gas $70 |
Dog food $60 | Dog food $60 |
Savings $100 | Savings $200 |
Emergency fund $50 | Emergency fund $100 |
Restaurants $100 | Restaurants $200 |
Entertainment $100 | Entertainment $100 |
Miscellaneous $90 | Miscellaneous $70 |
Books $100 |
As you can see, your categories are likely to change from pay period to pay period, especially since some expenses (like rent or your phone bill) only happen once per month. Other expenses (like food for you and your pup) will happen every pay period and should have an ongoing budget assigned to each.
As your bills and expenses fluctuate, you’ll be able to assign more or less money to each category or even create new categories entirely. In the above example, I assigned some extra income towards a retirement fund while also allowing for clothes and books envelopes.
If you’re looking for flexibility in your envelope budgeting, you might also consider adding a “miscellaneous” category. While this shouldn’t be abused or make up most of your income, having some buffer that can go towards anything is always a good idea. When compiling your list of envelopes, don’t forget to make a category to cover any unexpected expenses like medical bills, car repairs, or even a trip to the vet.
In the above example, I accounted for these things with an emergency fund envelope. Some envelopes like this one, might be something you contribute to (without ever touching) for months or even years on end, and that’s okay. Having multiple savings accounts to cover your various needs is always a good idea, and actively working towards building your savings is one of the reasons this style of budgeting makes so much sense.
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Who is this budgeting strategy best for?
Someone who wants to change their spending habits
If you’re looking to kick a bad spending habit, then this budgeting method might work wonders for you. Since the envelope system forces you to assign spending limits in advance, you won’t be able to go on a shopping spree and splurge half your paycheck on any one thing.
Anyone interested in saving more money
If saving more money is one of your top priorities, the envelope budgeting method can also help. Because you can set your own categories, you’ll be able to factor in extra savings for things like retirement, travel funds, or even an emergency fund.
Anyone with a steady income
Just by how this budgeting style works (dividing your income into envelopes), it’s easier to stick to if your income is somewhat steady. While slight income variations are expected, it might be a challenging budget style for anyone whose income changes drastically from week to week.
Who is this budgeting strategy not for?
Someone who doesn’t have the time to create envelopes
If sitting down and creating categories of spending (with set limits) every pay period sounds time-consuming, that’s because it is. This type of budgeting won’t work for someone who doesn’t have the time to create their envelopes and spending limits or someone who finds the process overly tedious.
Someone whose spending habits change frequently
Although unlikely for most people, it’s possible your categories of spending change too frequently for this budgeting style to make sense. If that’s the case, a less detail-oriented budgeting method (like one of these budgeting apps) may be better for you.
Anyone without a steady income
Again, because of the nature of this style of budgeting, it’s catered toward those with steady incomes. If your income changes drastically weekly, the time spent creating categories and spending limits might not make sense.
How to get started with the envelope budgeting method
Before you start assigning categories to your spending, you’ll want to know exactly how much income you have to work with. If your income fluctuates from paycheck to paycheck, now’s a good time to start recording it to understand better where you stand. Also, list any monthly expenses (car, rent, groceries, etc.) that you know of since you’ll want to include these as categories in your envelope system.
Now that you know how much money is coming in, it’s time to set up categories (aka envelopes) for your various expenses. Like the zero-based budgeting method, you’ll want to start by ensuring all of your essentials are covered first. This includes paying for your housing, transportation expenses (car insurance, train tickets, etc.), and food and utilities. Once those categories are accounted for, it’s time to consider what else you’d like to include in your envelope system. Maybe you’re hoping to save up to buy a house or a new car, or even just set aside more money for your retirement. Wherever you’d like the rest of your money to go, give it an envelope and set a budget for that category.
One of the most important aspects of succeeding in this budgeting method is sticking to your categories and their designated budgets. If you set a $200 budget for gas every month, do your best not to go over it. Remember, once the envelope is empty, your budget is spent for that pay period.
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Pros and cons of the envelope budgeting method
Pros
- Helps you curb spending habits. One of the biggest benefits of the envelope budgeting method is that it allows you to curb any bad spending habits by establishing a set budget for each category of your spending. This can help ensure your bills get paid on time, which can go a long way in improving your finances (and even bump up your credit score)! By setting your budget limits right after you get paid, you won’t have the option to overspend on anything. Once the envelope is empty, your spending limit for that category has been met, and you won’t be able to pour any more money in until the next pay period.
- Easy to save up towards your goals. Another reason I like the envelope system? It makes saving up for your financial goals that much easier. By designating envelopes to all of your saving goals, you’ll be able to regularly put aside money towards your various savings accounts, and be able to watch as those bank accounts grow.
- Simple to get started. Unlike other styles of budgeting which may require fancy spreadsheets or software, the envelope system is easy to start and doesn’t require any advanced budgeting skills or tools. All you’ll need are a few envelopes to store your cash, or a digital way to set and track your spending in each category.
Cons
- Can be harder to stick to without physical envelopes. Because this style of budgeting was originally invented with physical envelopes and cash in mind, it can be harder to stick to if most of your transactions occur digitally— like paying for bills online or using a debit card at the store. There are ways around this (like using the You Need A Budget app), but it’s definitely not quite as straightforward as cash in an envelope.
- Time consuming to set up. With all the manual legwork involved in this style of budgeting, it can be fairly time consuming to set up. If combing through your categories of spending and setting a limit for each doesn’t sound like your idea of a good time, you might look elsewhere for a simpler budgeting method to try.
- Hard for those with variable incomes. This style of budgeting requires dividing your income into various categories of spending, which may be harder to do if your income fluctuates regularly. If your paychecks fluctuate minorly between pay periods, that’s probably not an issue. But if your income changes in a significant way frequently, then adjusting the limits for your spending categories might be more work than it's worth. For someone with an ever-changing income, something like the 50/30/20 budgeting method is probably better.
The bottom line
Envelope budgeting might sound old-school, but there’s a reason it’s still one of the most popular styles of budgeting today. Easy to start (and stick to), the envelope system provides great visibility into how you’re spending your money and allows you to quickly gain control of your income by dividing it into categories. Whether you’re hoping to kick a bad spending habit or just start saving more money, the envelope system is a solid way to reach your personal finance goals.
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Writer
Larissa Runkle divides her time between a cabin in the San Juan Mountains and traveling in a converted van with her partner and pup. She writes for finance, real estate, and lifestyle publications, and is also at work on several fiction projects.
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