Budget with Envelopes

Brent Pittman —  10/07/2012

Have you ever heard of using the envelope system to budget? Envelope budgeting is an old technique that is coming back in fashion faster than big glasses and flannel shirts.

What is it? Budgeting with envelopes is simple. Certain categories you’ll designate to pay only with cash. You put that cash in an envelope each month and when the money is gone–its gone, no more spending for that category.

Why use Envelopes for Budgeting?

  • You’ll spend less money if you use cash. People who use credit or debit cards have higher spending rates? Why? It is due to a slight feeling of pain when you use cash. It’s true, try plunking down $100 cash for your next grocery bill.
  • Savings. We have an envelope for a future trip to San Francisco. When it fills up, we go!
  • If you constantly overspend in certain categories, this will help you curtail that spending.
  • If you get paid in cash or tips this system will give that cash somewhere to go, besides buying pizza. It will focus your money and you’ll think that you’ve got a raise.

Envelope System Video by 

Budget with Envelopes

1. Determine what categories you’ll spend “cash only” for. Common categories are groceries, eating out, blow money, entertainment, clothing, and gas. TIP: Don’t try to start too many envelopes at once, but incorporate a few each month as you get the hang of it.

2. When you budget add up the total you’ll need each month to fill all your envelopes. This may take a few months before you’re a pro and some months will require more cash than others.

3. Make envelopes for each category and fill them up with cash- Write a check to yourself or withdraw it from the bank. Some categories may be large like groceries and you’ll need to fill them twice a month or as you are paid.

4. Keep a ledger of on each envelope of when money is deposited and spent. This will help you track your cash and know how much you’ll need each month.

5. When the envelope is empty, STOP SPENDING! You made a budget, now stick to it. Don’t borrow from other envelopes or add more cash. You’ll have to say no until next when you get more cash in that envelope.

6. If you have extra cash, then it stays put and rolls over to the next month.

Some people also like the idea of ‘virtual envelopes‘, but I find that having cold hard cash in your hands is the best way to curtail my spending.

Using this system doesn’t work for everyone. If you stay with it through the learning curve, you’ll start saving money by spending less. My wife and I started out with about 8-10 envelopes ourselves, but at the moment we only use 4.

Action: Try using the envelope system and let me know how it goes in the comments. 

(Photo by BillRhodesPhoto)

[This is part of my How to Budget Like a Pro blog series]

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Brent Pittman

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Brent is a financial coach and writer looking for the perfect donut. He believes personal finance should be both fun and accessible to anyone willing to learn.
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  • Kim

    I am terrible about losing cash and carrying envelopes I can also never seem to make it to the bank before closing. I’ve never tried to hard to do this method, but I probably should at least for groceries.That’s lots of excuses, isn’t it?

    • We don’t use as many envelopes as before, so getting cash at the grocery strore is what we normally do–especially since our bank is online only.

  • I love the envelope system, but only because I thought I invented it when I was 10 years old. Then when I grew w up that old Dave Ramsey stole my idea. Jerk. Anyways, I still use a similar system, but now its all digital. Funny thing – my father in law still has “secret” envelopes all over his house. My wife and I always joke about him forgetting about them one day.

    • I suspect $ envelopes were around a long time before Dave–he just has good marketing.

  • maria@moneyprinciple

    We use it but not to full effect. What we have been doing for some time now is to withdraw cash for food, drinks, window cleaner and adult pocket money (nothing kinky in this; it is just that the grown ups in the house alos have pocket money) – this way it is easier to keep everything in check. Where we are missing on the full effect is allocating very exact amount to different categories of spending – reputedly this reduces spending greatly.

    • For most people using cash reduce the amount of money spent. Thanks for sharing your system.

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  • Jackie Walters

    We use the envelope system in our house as well.  It works great for us, but I must admit I sometimes steal from “Peter to pay Paul” ! I have envelopes for Groceries, Dining Out, Entertainment, Clothing, Health & Beauty and Gifts.

    • It’s hard to stop yourself when you see that cash sitting in another envelope. Stay strong!

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  • I had forgotten about budgeting this way. My cousin has done it for years. It really does help.

    • Becky,

      It sure does! Your cousin sounds like a smart guy or gal.