What is the Envelope Budgeting Method?

When it comes to budgeting, everyone should find the best budgeting method for them—some people will benefit from spreadsheets, or apps, or keeping a written budget in a journal. For some people, the envelope method is an effective budgeting system.

What is the Envelope Budgeting Method?

With the envelope method, the budgeter puts together a written budget, and then divvies up cash into separate envelopes for different spending categories. They must limit spending to just what is allotted in the envelope, and by using only what’s in each envelope, it’s impossible to overspend.

How does the Envelope Budgeting Method Work?

To implement the envelope method, start by tracking your spending. You won’t know how much to put in each envelope until you’ve figured out how much you’re currently spending. You can also try to reduce spending from your current levels, but don’t set a budget that is unrealistic. The goal is to set hard spending limits and use cash instead of credit or debit cards for day-to-day spending.

Everyone’s spending categories will be unique, but the big ones will include groceries, household supplies, gas, and entertainment spending. It might also be a good idea to set aside an envelope for savings goals, debt repayment, etc.

More resources: Tips to Reduce Your Debt

Usually, the budget should be monthly, but cash from income might be added as you get paid, weekly or bi-weekly. Keep the total monthly amount you add to an envelope within what you budgeted.

For example, the Bureau of Labor Statistics estimates that people spend approximately $300-$500 per month on groceries, depending on the area in which they live. So, if you’re currently spending $330 per month on groceries, you might try to cut that to $300 under your new budget. Put that amount in cash into your groceries envelope, and spend carefully so you don’t run out until the month is over. You’ll do that for every other spending category.

“Pros” of the envelope budgeting method:

It Helps You Spend Less

People simply don’t like parting with cash, while swiping a credit card is easy. If you force yourself to use cash when shopping, you’ll be more careful how much you spend.

It’s Visual

You can see how much money you have in each budget category–literally. If you see a really overstuffed envelope, you can do some thinking about why you are spending so much in that area and whether you can make some cuts to boost your debt repayment or savings. A line item on a spreadsheet won’t jump out at you like an envelope full of cash.

It’s Hands-on

You can’t fool yourself when you’re actually doling out cash—there’s no way to trick yourself into thinking there is more money in the bank just because your credit cards aren’t maxed out yet. Because you’re physically doling out cash, when you run out, you’re out. So, the theory goes, it’s harder to cheat on your budget.

It’s Straight-forward

You don’t have to do a lot of complicated calculations, pay for a subscription to a budgeting app, or log into any banking web sites. With the envelope method, there are no passwords to remember! You simply categorize the money according to your budget categories, and then stick to spending only the cash you have allotted.

“Cons” of the envelope method:

It Requires Starting Cash

The envelope method will require a lot of cash on hand, and that will involve draining your bank account to fill the various envelopes. It’s best to save up in advance of starting the envelope method–but of course if you are able to easily save up, you might already have a different and effective budgeting method. You have to be careful in the beginning when starting the envelope method, because if it goes wrong, all of your money has already been cashed out.

You’ll Be Carrying Cash

You give up the advantages of banking and credit, and are at risk of losing money—literally. You also have to get used to carrying cash and paying only with hard currency. Ideally, you would leave your debit and credit cards at home when trying to live on the envelope system.

It’s Not Necessarily as Secure

Theft can be a concern with the envelope method. If you have all of your cash for the month in envelopes and you suffer a break-in, the financial impact could be devastating. Make sure you have a way to secure your envelopes against theft before attempting this kind of budget.

It’s Easy to Cut Corners

Earlier we said it’s harder to cheat with this budget, but that’s only true if you abide by the limits you set when funding your envelopes. If you dip into the wrong envelope or sneak money from one place to cover another, your budget is easily busted.

It’s More Hands-on Work

Using an app, your bank’s web site, or even printed worksheets is efficient and organized. The only reason to do the extra work involved in the envelope method is if you are able to budget more easily by physically assigning the funds.

Sharing the Budgeting Workload is Harder

It’s better to do the envelope method if you’re the only person controlling the household budget. If you share shopping and bill-paying duties with anyone else, the envelope method is much harder to manage. You might do everything right, but if someone else uses the wrong envelope, or spends money without documenting it, then your budget will fail.

Online Shopping is Harder

These days, most people do some portion of their regular shopping online. That’s only prudent, when you can save money and trips to the store by comparison shopping via the internet. That said, if you’re using the envelope method, you have to take cash out of your envelope and deposit it to pay for each purchase you make online.

It’s Not Flexible Enough

Your spending needs might change due to circumstances; for example, you might have higher healthcare spending during flu season. Or changing gas prices might make it more expensive to get to work. If you don’t have enough cash in your gas envelope to cover a hike in fuel costs, you’ll have to break your budget to get to work and keeping earning an income.

If you do the envelope method the way you are supposed to, without ever going over the cash amount allotted in a given envelope, then you won’t be able to respond to changing conditions easily.

It Doesn’t Prioritize Debt Repayment

One of our top priorities for budgeters is to pay off debts. No matter how much interest you’re earning from savings, it’s likely less than what you’re paying in interest on your credit card debts. Until you get those debt payments out of your life, you’ll never achieve financial freedom. Once you do pay off revolving debts like credit cards, you’ll have a much easier time budgeting for important savings goals.

The envelope method is helpful in organizing and limiting your spending, but doesn’t lend itself to paying off debt quite like other budgeting systems. The good news is, the envelope method should make it harder to incur more debt, assuming you limit yourself to only spending cash on hand.

Tips for Employing the Envelope Budgeting Method:

  • Carry bigger bills. People are naturally reluctant to break big bills, but will spend lower denominations more freely. Keep your cash envelopes funded with the largest bills you can, so it’s not so easy to nickel-and-dime yourself with impulse spending.
  • Use envelopes for “virtual” expenses. Create an envelope for those online purchases we talked about. If you buy online for a particular category, take cash from that envelope and put it into the online shopping envelope. Never spend from the online shopping envelope! That money is to be deposited to pay for purchases made online.
  • Don’t include fixed expenses. If you have a regular expense that is consistently the same amount, use auto-pay and don’t create an envelope for it. We’re thinking of things like your rent/mortgage, car payment, auto insurance, cell phone bill, and any other monthly expenses that are predictable and don’t vary in amount.
  • Don’t use this method for savings! Like fixed expenses, make savings automatic by having a percentage of your income direct-deposited into some kind of savings account. Savings should be kept secure, in a bank, and earning interest. Don’t keep savings in a form that is too easily accessible, like cash in an envelope. If you do set aside money from your envelopes for savings (e.g., if you don’t spend all of a particular envelope one month) deposit it right away, don’t let it sit around as cash for too long.
  • Make discretionary spending specific. Avoid having an envelope that says “fun money.” That gives you way too many options and you will see that money disappear quickly. Create specific envelopes for activities like “restaurants,” “movies,” “video games,” etc. Put some extra thought into where you’re spending on wants like these, and fund envelopes for the specific things that are most important to you.
  • Stay flexible from month to month. If you have a lot of money in a particular envelope left over at the end of the month, or keep coming up short in a particular envelope, adjust your budget. The envelope method is not going to be useful if you keep having to break your budget to get through the month. Living with cash instead of credit should make you more frugal, so the idea is to spend less on certain categories over time. Don’t keep putting the same amount in an envelope after you’ve figured out how to get through the month spending less.
  • Use big envelopes, so you can keep a tracking sheet or receipts in them. You might even print budget tracking sheets on the outside of large envelopes, so you can log what you spend. This is especially important if more than one person has access to the envelopes—always track every dollar you take out and why, so you can keep communicating about your budget. Get in the habit of putting receipts back in the envelope after you take cash out, so you can keep tracking and balancing your budget over time.

The envelope method isn’t for everyone, but you might find that using cash and strictly limiting yourself is the best method for you. Your goal should be to evolve back into traditional banking, online bill-paying, and taking advantage of the security that comes with using debit cards, buying online, etc. There’s even room for credit card spending in a healthy budget, as you’ll get extra security, rewards and other benefits from responsible credit card use.

Switching to the envelope budgeting method should be the kind of emergency tactic you do if everything else is failing and you need to radically change how you handle your money. Talk to a credit or debt coach before making this kind of big change to be sure you are ready to live with a new budget. And don’t forget about savings! If you really want to try the envelope method, then establishing an emergency savings fund will be very important.

Speak to our certified Financial Coaches to review all of your options and discuss best strategies for getting out of debt.Speak to our certified Financial Coaches to review all of your options and discuss best strategies for getting out of debt.

About The Author

Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.