Is the Envelope System the Best Budgeting Method? (2024)

Is the Envelope System the Best Budgeting Method? (1)

Finding the right budgeting system can take the hassle out of managing your money. The envelope system is a popular option for creating a household budget and it's the one advocated by personal finance experts like Dave Ramsey. But how does the envelope system work and is it the right choice for you? If you're looking for a new approach to budgeting, here's what you need to know.

What Is the Envelope System?

In a nutshell, the envelope system is what it sounds like—dividing up your monthly or weekly funding budget into various paper envelopes.

Each envelope is assigned to a specific category, and is designed to manage discretionary expenses. Discretionary expenses, also called variable expenses, are amounts you spend every week or month but might change from month to month.

How to Set Up an Envelope System Budget

Learning how to budget using envelopes isn't that difficult, even if you've never budgeted before. It's very similar to making any other kind of budget, with a twist. Here's a checklist for getting started:

1. Establish Budget Categories to Assign Each Envelope

The first step in using an envelope system is deciding which expenses to include in your envelopes. This part of the process is personal—you're tailoring each envelope to your specific budget and spending.

Your envelope labels might include general categories such as groceries, gas, clothing, entertainment, and savings, for example.

Note

Review last month’s bank statement to figure out your categories.

2. Allocate Dollar Amounts to Each Envelope

Once you have envelopes for the expenses you want to manage, decide how much money goes into each. This should be easy to do if you've already added up your income for the month, then subtracted the amounts you need to set aside for your fixed expenses. If you haven't done that yet, hit pause and tackle that task.

If you’re paid weekly or biweekly, you may need to look at budgeting on a weekly level.

So let's look at the list of example envelopes from earlier. Assume that you have $1,000 total to fill up those envelopes for the month. Your allocation might look like this:

Groceries$400
Gas$150
Dining$100
Clothing$100
Entertainment$50
Gifts$25
Savings$25
Personal Care$50
TOTAL$1000

The sum total of the envelopes should reflect the sum total of cash you have to assign.

On the front of the envelope, write down the starting amount you have to spend for that budget category.

3. Withdraw Cash to Fill Your Envelopes

At this step, you withdraw the cash you need to fill your envelopes. Ideally, you add the cash you need to each envelope at the beginning of the month. Then for the rest of the month you take money out of the relevant envelope when you need to make a purchase in that category.

If you're planning to withdraw cash for your envelopes from an ATM, check your bank's maximum daily withdrawal limits first. You may need to visit a branch instead to get the total amount of cash you need. If you don’t have enough money in your account for the month, set up a weekly envelope system.

Note

Keeping large amounts of cash in envelopes at home can present the risk of theft or loss; store envelopes in a safe place. As well, never pay bills by sending cash through the mail.

4. Track Your Spending for Each Envelope

If you've divvied up the cash in your envelopes you're ready to start spending money for the month.

To make the system work, keep a running total of how much money you have to spend for each category. Each time you withdraw money, subtract it from the amount to get a running total of cash remaining. Take the envelope with you when shopping, or if you don't have time to jot down how much money you've pulled out of your envelope before making a purchase, store the receipt and come back to it later.

Using the Envelope System With Credit or Debit Cards

The envelope system may be harder to use if you’re paying all of your expenses with a debit card, or use a credit card that you try to pay off monthly. If you primarily use credit or debit cards, there are web and phone apps that rely on a virtual envelope method, such as Mvelopes.

Or you can create your own system in the following manner:

  1. Establish budget categories and assign an envelope to each category. Write on each how much you intend to spend for the month.
  2. Always request or accept receipts when using your card, and add receipts to the envelope at home. Write each receipt amount on the correct envelope’s exterior to keep a running total of expenses.
  3. Don’t spend more than the amount you’ve assigned.

Note

Avoid the temptation to spend on credit. If an envelope runs out of money in a particular category, it may be easy—and tempting—to keep spending using credit. But that can lead to debt, which can blow your whole budget out of the water. So stick with just spending what you already have, whenever possible.

The Bottom Line

The envelope system isn't hard to master, but only spend what's in each envelope. Once the money in a specific envelope is gone, it's gone for the month. You can't spend more in that category until the next month starts or dip into other envelopes. The purpose of using envelopes to budget is to stay in control of what you're spending. If you’re spending more than you have, change your spending patterns or your budget.

Remember that you don't have to spend each envelope down to $0 each month. Cash left over means you spent less than you planned. Pay down debt, or add leftover cash to your emergency fund. Giving any extra dollars a purpose is key to ensuring the money doesn't go to waste.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

  1. North Dakota State University Extension. "Use the Power of Envelopes to Take Charge of Your Spending."

  2. Consumer Financial Protection Bureau. "Budgeting: How to Create a Budget and Stick with It."

  3. North Dakota State University. "Using Envelopes to Track Expenses."

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Now, let's dive into the concepts mentioned in the article about the envelope system for budgeting.

What Is the Envelope System?

The envelope system is a budgeting method that involves dividing your monthly or weekly funding budget into different paper envelopes. Each envelope is assigned to a specific category, such as groceries, gas, clothing, entertainment, and savings. The envelope system is designed to manage discretionary expenses, which are amounts that you spend regularly but may vary from month to month.

How to Set Up an Envelope System Budget

Setting up an envelope system budget is relatively straightforward. Here's a checklist to get started:

  1. Establish Budget Categories to Assign Each Envelope: Decide which expenses you want to include in your envelopes and tailor them to your specific budget and spending. You can review your previous month's bank statement to figure out your categories.

  2. Allocate Dollar Amounts to Each Envelope: Once you have envelopes for the expenses you want to manage, decide how much money goes into each envelope. This can be done by adding up your income for the month and subtracting the amounts needed for fixed expenses. If you're paid weekly or biweekly, you may need to budget on a weekly level.

  3. Withdraw Cash to Fill Your Envelopes: Withdraw the cash you need to fill each envelope. Ideally, you should add the cash at the beginning of the month and use the relevant envelope when making a purchase in that category. If you plan to withdraw cash from an ATM, check your bank's maximum daily withdrawal limits. It's important to store the envelopes in a safe place to avoid theft or loss.

  4. Track Your Spending for Each Envelope: Keep a running total of how much money you have left to spend in each category. Subtract the amount each time you make a purchase and store the receipts for reference. This helps you stay within your budget and maintain control over your spending.

Using the Envelope System With Credit or Debit Cards

If you primarily use credit or debit cards for your expenses, using the envelope system may be more challenging. However, there are web and phone apps available that rely on a virtual envelope method, such as Mvelopes. These apps allow you to create virtual envelopes and track your spending electronically. Alternatively, you can create your own system by establishing budget categories, assigning an envelope to each category, and keeping track of expenses by adding receipts to the envelopes.

It's important to avoid the temptation to spend on credit if an envelope runs out of money in a particular category. Stick to spending only what you already have to avoid going into debt and maintain control over your budget.

The Bottom Line

The envelope system is a budgeting method that helps you manage your discretionary expenses by allocating cash to different envelopes for specific categories. It allows you to visually see how much money you have left to spend in each category and helps you stay in control of your spending. Remember to only spend what's in each envelope and adjust your spending patterns or budget if necessary.

I hope this information helps you understand the envelope system for budgeting. If you have any further questions, feel free to ask!

Is the Envelope System the Best Budgeting Method? (2024)
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