The envelope system is a method of budgeting that holds you accountable to your budget better than any other budgeting system.
The envelope system of budgeting ensures that you stay on budget. In fact, you can’t get off budget if you use the envelope system – it’s that good.
The Envelope Budgeting Rules
The envelope system is a cash only budget. This is why you can’t go over budget — you will only have so much cash on you and you can’t spend what you don’t have.
Here’s what you need to do to start using the envelope system of budgeting:
- Get on a written budget (the most important part!). Learn how to budget for beginners if you’ve never done this before. Essentially, you will subtract your expenses from your income, and give every dollar a purpose in your budget.
- Label envelopes with titles for each category of your budget that you can use for cash. For example, you could have an envelope that says “Groceries” and another that says “Entertainment.” Use envelopes with labels for as many categories as possible.
- Allocate a dollar amount to each envelope based on your budget. Take your budgeted amount from step one and put that dollar amount in the envelopes you created in step two. For example, if you budgeted for $500 for groceries for the month, you need to put $500 in your “Groceries” envelope.
- Each pay period fund the envelopes with the specified amount (weekly, monthly, etc.). If you’re paid twice a month, then fund the envelopes as you’re paid ($250 first pay and $250 second pay, for example).
- Use the envelopes to pay for all your purchases. Bring your envelopes with you when you go out spending money. Only use the money in your envelopes for your purchases.
- Don’t spend money from other envelopes and don’t use a credit card (no cheating!). If you have money left over in your envelope for groceries but you’re out of money in your entertainment envelope, do not use your grocery money for entertainment. Instead, keep that money and wait until the next month to budget differently. This is help you follow your budget and stick to your plan.
- Repeat monthly. Every month is a little different, so you need to repeat the process monthly to allocate for a new monthly budget. Use the same steps and adjust for that month’s needs.
If you haven’t budgeted before, then this may seem overwhelming. Putting this in writing (or in an excel document) is really important. Thinking about it isn’t enough – you need to write it down. Once you decide where all your money is going to go for the month, including your savings, then you are done creating your budget. That was the easy part! The hard part is following through. Once you have your budget created, you can move on to step two above.
- Related: How to start budgeting for beginners
The Pros of the Envelope System
If you follow the steps above, you will stay within your budget. Why? Because you literally can’t overspend if you don’t have the cash in the envelope. This method is simple, straightforward, and it really works. Your spending will become more disciplined. If you are having trouble sticking to your budget, then you should try the envelope system.
- Related: 21 Days to a Better Budget
The Cons of the Envelope System
With the envelope system of budgeting, you give up on credit card rewards points. It’s certainly not a budget for everyone. But if you are consistently going over budget and you’re a spender, then giving up the rewards should be worth it.
Another downside is that this system only works if you do it as a family. If you are using the envelope system but your husband isn’t, and he goes over budget, it’s sort of fruitless. So, this can be a challenge to using this budget (and any budget, really).
Tips to Help You Budget Using the Envelope System
- Use the envelope system for the categories you struggle with most. The harder it is for you to stay in budget for that category, the more likely you need to use cash and the envelope system. For example, I would benefit most from using the envelope system for shopping. I love my clothes, shoes, girly stuff, etc. It’s my weakness! So, having cash set aside every month for this category would help me the most because that’s where I’m most likely to overspend (it’s where the temptation is for me). Whatever your weakness is, use the envelope system for that, at a minimum. Of course, the more categories you can use it for, the better!
- Use EveryDollar with the envelope system. EveryDollar is an online budgeting tool that you can use to create a digital budget. It’s not like a tracking system, like Personal Capital, which I love for that purpose, for example. EveryDollar is different. It’s a digital budget – you enter your income and expenses in the app, just like if you created a budget in an excel file. You can also link your bank accounts to EveryDollar to make categorizing your spending in your budget super easy. It’s free to join, and it’s one of Dave Ramsey’s newest budgeting tools, which is why I think it’s even more perfect for someone using the envelope system. For example, let’s say you pay your electric, gas, water, internet, and trash bills online. You can add those as expenses in EveryDollar and it will show what you project to pay and what you actually pay for these expenses. Then, you can use the envelope system for the categories that make sense to use cash, such as eating out or shopping. You can then enter what you actually spend in EveryDollar, so you can have your budget complete. In my opinion, there’s no downside to this because it helps you increase your likelihood of budgeting success. And who doesn’t want that?
A Final Note!
If you are a spender, the envelope system is a really good budgeting system for you to consider.
I know this because I am a natural spender! In fact, I’ve never had a credit card because of this fact (I have good credit because of my student loan debt, for those of you wondering).
The nice thing about the envelope system is that it allows you to get on a budget and implement staying in budget right away. You can use this budget immediately (no saving required). All you have to do is create a budget, take out cash, and start using the envelopes. It’s easy and forces you to be disciplined. So, why not try it?
- Up Next: The Ultimate Guide to Budgeting