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Sep 19, 2023

How To Manage Your Money With Envelope Budgeting

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Learning how to make a budget can be an important foundation for working toward your financial goals. There are many strategies that can make it easier to build a budget and manage your money, and envelope budgeting is a popular one. With this simple approach, you group your monthly expenses into categories, or envelopes, and dedicate a specific amount to each one. Then you spend money in each category using either actual envelopes and cold, hard cash or your bank account and debit card. You’ll know you’re at your monthly spending limit for each category when your physical or digital envelope is empty. 

In this article, we’ll cover:

How envelope budgeting works

The envelope system helps you manage your predictable bills, like rent and car payments, as well as variable expenses, like groceries, entertainment, household goods, and personal care. Simply group your expenses into categories, grab some envelopes, and label each one with a category. When you get paid, put a predetermined amount of cash in each envelope. Spend as needed from each category, but when the cash is gone, you’re done spending until your next paycheck comes.

For example, say you’ve allotted $200 per month for entertainment. The next time you head to a movie with friends, grab your “entertainment” envelope and pay for your tickets and snacks with that cash (or your debit card if you’re using digital envelopes). The amount left in the envelope is your remaining entertainment budget for the month.

Benefits and downsides of the envelope system

Every money management strategy has its pros and cons. While simple and straightforward, the envelope system may not provide the flexibility you need. Let’s take a closer look at the benefits and downsides of envelope budgeting.

Envelope budgeting pros

The envelope method is designed to give you a sense of clarity and control over how you spend your money. For many people, using physical cash makes spending feel more “real” while providing a better understanding of everyday spending habits. And it may even help you spend less on impulse buys.

  • What you see is what you can spend: Whatever is left in the envelope is what you can spend for the whole month, so you’re always aware of your limits. That can make unplanned purchases less tempting.
  • Using cash may help you spend less: If you’re motivated by little rewards, it’s gratifying to see cash left in your envelopes at the end of the month. And when you see the dollars in your envelope dwindling, you may feel more motivated to keep a close eye on your spending.
  • Helps you understand your spending habits: After a few months, the envelope method can help you identify trends in your spending so you can make sensible adjustments to your budget. If your grocery envelope is usually empty before the end of the month but your entertainment envelope tends to have some cash left over, it may be time to reallocate some funds. 
  • Can accommodate cash or debit card spending: Envelope budgeting works just as well with cash and real envelopes as it does with a debit card and digital “envelopes.” Various budgeting apps and online banking tools are widely available to help you maintain a cashless envelope system.
  • Simple and straightforward: New to budgeting? The envelope method makes it simple to track where your money is going and how quickly you’re spending it. You’ll either have the cash to make a purchase or you won’t. 

Envelope budgeting cons

While envelope budgeting is simple and straightforward, it can get tricky if you need lots of flexibility or share expenses with others.

  • Limited flexibility: Simple doesn’t always mean flexible. By setting strict limits on spending in different categories, envelope budgeting can feel restrictive, especially if you struggle to accurately estimate your expenses. 
  • Harder to track for more than one person: Sharing expenses with spouses, partners, or kids isn’t unusual, but envelope budgeting may make it more difficult. Tracking how much money is going in and out of envelopes with multiple users can be complicated and time consuming.
  • Can be cumbersome if you use cash: Carrying cash in your wallet can be bulky, especially if you’re managing small bills and coins. And certain expenses are harder to pay for in cash; there are even some stores that no longer accept cash payments.
  • Complicated to adjust on the fly: If you run out of cash in one of your envelopes and want to immediately reallocate some funds from another category, you’ll need to do some inconvenient shuffling and be careful that you’re not shorting one category too much. 

How to start envelope budgeting in 5 steps

Ready to get started with envelope budgeting? These five steps will show you how.

1. Determine your monthly take-home income

Your most recent pay stub should show you your net income, or the total income you bring home after taxes and any other deductions are subtracted. Write down that number, along with any additional sources of income you might have from things like interest, child support, or side gigs. Your monthly take-home income is the total of all those numbers.

2. Calculate your monthly expenses

Make a list of all your monthly expenses and how much you spend on each one. Include necessities like housing, groceries, utilities, and discretionary spending on things like streaming services and hobbies. Don’t forget about debt repayment and money for savings and investments. 

Variable expenses can be a bit tricky to calculate. For things like groceries, gas, dining out, and other things that change from month to month, take a look at your spending over the last six months and determine your average spending to get a baseline number for planning your budget.

Don’t forget to account for irregular expenses that don’t happen each month, like vehicle maintenance, vet bills, haircuts, or quarterly water bills. For these expenses, you’ll want to determine how much you need to put aside each month so you have the money when you need it. For example, if you spend $90 on an oil change every three months, divide that expense by three and record your monthly oil change expense as $30. 

3. Compare your income and expenses

Now it’s time to see how the numbers line up. Are you making enough to cover your monthly expenses? If not, it’s time to take a closer look at your spending to decide what’s essential and what you could cut from your budget. Shopping around for better prices on things like car insurance and phone plans can also help you trim your spending. You might also consider picking up a side gig if you want to increase your income.

If you’re earning more than you spend, congratulations. Consider putting that surplus into savings, using it to pay off debt, or investing it to work toward your long-term financial goals. 

4. Determine envelope categories and allocate money

Now that you’ve identified all your monthly expenses and know you can cover them with your income, it’s time to create the spending categories that will be your envelopes. This step is where you really define your monthly budget.

Start by grouping your expenses into categories that make sense for you. You might want to get very granular, such as having separate envelopes for entertainment at home, going out to events, and dining at restaurants. Or you may prefer to have one general envelope for entertainment that includes all of those things and more.  

Once you’ve settled on your categories, decide how much money you’ll allocate to each envelope every month based on the spending needs you determined in step one. You may need to adjust this a bit from month to month, such as putting more into your “gifts” envelope when a friend’s birthday is coming up, but the goal is to create a spending plan you can stick to over time. This is also the time to think about your goals and plan accordingly. For instance, if getting out of debt is a priority, you’ll want to allocate more than just your minimum payments to your envelopes for credit cards and loans.

Budgeting tip: one way to make the envelope system a bit more flexible is to have a “miscellaneous” envelope with a bit of money you can dip into if small, unexpected expenses arise. Just be careful not to rely on this envelope too much or you won’t be getting the full benefit of planning and tracking your spending. 

5. Stash your cash or take your envelope system digital

Now it’s time to make those envelopes real. If you’re going the cash route, grab a stack of paper envelopes and start labeling. Then stuff your envelopes and start using that cash to pay your expenses. If you prefer a less tactile approach, create digital envelopes by setting up categories in a budgeting app or your online banking tools and use your debit card to take care of your expenses. 

After you’ve tried envelope budgeting for a few months, you might want to review your spending and make adjustments to your budget. Have you encountered expenses that you forgot to include initially? Are you consistently running out of money early in some categories or winding up with a lot leftover in others? Tweak as necessary to make your envelope system work for your life. 

Other budgeting strategies

There are countless ways to budget, so don’t be afraid to experiment until you find the approach that works best. If you try envelope budgeting and decide it’s not right for you, consider the 50/30/20 rule or the zero-based budgeting system.

The 50/30/20 rule

The 50/30/20 rule is a budgeting guideline that divides your monthly income among three broad categories: 50% to needs, 30% to wants, and 20% to savings/investing. Like the envelope method, this approach can simplify the budget process and make your money management easier by grouping your expenses into categories.

The zero-based budgeting system

The zero-based budgeting system gives every dollar you take home a specific function and leaves you with no unused money at the end of the month. Because every dollar is assigned a specific purpose, it can help reduce impulse spending and allow you to plan your budget very precisely. 

Your wallet, your budget

If you often wonder where your money goes each month or tend to spend more than you’d planned, envelope budgeting can help. When you open your wallet, you can see exactly how much you have left for the month and make choices accordingly. 

The right budgeting strategy can make managing your money less stressful and give you confidence when working toward your goals. Even if you’re a budgeting beginner, don’t worry. You’ve got this.

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Written by

Tara Blaine

Tara Blaine draws on over 20 years of experience as a writer to translate seemingly complex financial ideas into insights readers can put to work in their everyday lives. She’s written personal finance education materials for numerous institutions, helping customers learn smart techniques for budgeting, overcoming debt, saving money, and planning for their long-term financial health.


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