How To Use the Envelope Budgeting System

From apps to spreadsheets and expert-recommended methods, there are a lot of ways to create and follow a budget. No one system is best since each person has their own preferences, but finding one that works for you can be a game-changer.

While it isn’t the most modern approach, the envelope budgeting system is a time-tested budgeting strategy that involves putting specific amounts of cash into labeled envelopes. Unlike some other strategies, this method sets clear boundaries around your spending, but it can also require more time and organization.

Here’s what you should know if you want to try out the envelope method or if you want to improve your envelope system.

What Is the Envelope Budgeting System?

The envelope budgeting system is a cash-based approach to budgeting. To follow the system, you label an envelope for each of your discretionary spending categories—the categories that don’t have a fixed cost each month—and then fill the envelopes with the amount of spending cash you’ve allocated in your budget.

You can use either physical envelopes or the digital envelopes that come in a budgeting app or a bank account, but we’ll focus on the physical option since it offers unique benefits when compared to other budgeting methods.

According to Jenny Groberg, CEO and founder of BookSmarts Accounting and Bookkeeping, the envelope budgeting system helped her, and her husband pay off $250,000 in student loan debt in just two years.

“I would recommend the envelope system for ANYONE wanting to budget successfully,” Groberg says.

She believes this system is a great choice for people who’ve been unsuccessful using apps or software to track spending in the past, and for couples who can’t seem to keep up with what their partner is spending. “I would argue it’s an issue for 80% of couples,” she says, “because one will usually be found overspending and blowing the budget.”

Is the Envelope System the Same as Cash Stuffing?

If you follow FinTok (financial content on TikTok) the envelope budget system probably sounds familiar. That’s because in 2023,”cash stuffing,” which is just a new way of referring to the envelope method, went viral on TikTok. Whatever you call it, both systems involve budgeting a set amount for everyday spending categories and then placing the cash into labeled envelopes.

How the Envelope Budgeting System Works

You’ll have to follow a few steps to get set up and stay on track with the cash envelope system. Here’s how it works:

Step 1: Calculate Your Total Monthly Income

First, pinpoint how much money you have available to work with each month. Be sure to consider all of your forms of income, including W2 wages and government benefits.

You’ll want to use your net (not gross) earnings, which is the money you have left over after taxes and withholdings.

For people who are paid bi-weekly (every other week), you’ll also want to keep in mind that some months have more than two paychecks. Here’s the most accurate way to calculate your income if you’re paid bi-weekly:

Monthly income = (net pay per period X 52 weeks in the year) / 12 months

Step 2: Create Spending Categories for Your Budget

Now you’ll need to create budget categories that correspond with each of your everyday expenses. Everyone’s spending categories are a little different, so you might need to review your recent financial statements to pinpoint all of yours. Common categories include:

• Gas/transportation
• Food/dining out
• Clothing
• Entertainment
• Gifts

Step 3: Allocate Funds to Each Budget Category

Your budget probably has a lot more spending categories than you think. Give yourself some time to sit down, write out each expense and, if necessary, look up bills and accounts to pinpoint specific costs.

Once you’ve written out all your necessities, including housing, utilities, food, transportation, and medical needs, plus your debt payments, put some thought into how much you can reasonably spend in the other categories in order to stick to your financial goals. Using a budget calculator can help.

Then, when you’ve decided how to allocate your funds, label your envelopes, and place the corresponding amount of cash into each one. For some people, it can also work best to create just a few envelopes for your problem spending areas.

Groberg also recommends filling envelopes with the weekly allotment as opposed to the monthly amount. “If you have an envelope for the entire month, it’s easy to feel the breathing room and be a little more generous with your spending,” she says.

Step 4: Use the Allocated Cash for Expenses

The envelope system won’t work if you don’t keep your envelopes handy. Make sure you can access them easily when you’re out and about. If you forget them, try to skip spending until you get a chance to go home and pick them up.

Take time at the register and use the correct envelope when making a purchase, too. You can take it one step further and make a note of each purchase from the envelope.

“Write on the envelope the date and how much you spent,” recommends Groberg. “This will help you adjust for the coming months and aid in your planning. You’ll be able to spot trends, failures, and see the timing of when and how you spent.”

And while you might be tempted to borrow extra money from another envelope to cover overspending, try to avoid doing so since you could end up throwing off your whole system.

Pros of Envelope Budgeting

These are some great reasons to consider the envelope budgeting method:

• It’s free.
• It discourages overspending.
• Helps break dependence on credit cards.
• Helps you catch budget issues in real time.
• Creates a tangible form of accountability.

Cons of Envelope Budgeting

Here are some reasons a cash-based system might be wrong for you:

• Withdrawing and handling cash can be inconvenient.
• Takes time to organize.
• Cash isn’t insured against loss or theft.
• You won’t earn credit card rewards on cash purchases.
• You can lose out on interest earnings for your cash deposits.
• There’s room for human error.

What to Do with Remaining Cash in Your Envelope

If you have extra cash in an envelope, it could be a sign that you allocated too much to a certain spending category, or that you successfully reduced an expense. Either way, it’s important to decide what you’ll do with the money in advance.

If you don’t need the cash to cover another expense, you can roll it over to next month’s envelope for the same category.

Alternatively, if you want to make improvements in your overall financial situation, you can go through this list to find a good use for the cash:

1. Pay off high-interest debt such as credit cards.
2. Add the money to your emergency savings fund.
3. Add the money to a sinking fund, or a fund for a specific, upcoming expense.
4. Contribute it to your retirement account.

What Happens When Your Envelope Runs Out of Money?

If your envelope runs out of money, make sure to learn from the experience.

Did you underestimate the expense? Did you choose to overspend? If you’re consistently running out of cash, it could be a sign that you have a spending problem or that you need to increase your income, or you may need to revisit your budget to find the problem.

As with any budgeting method, you’ll probably have some trial and error. The important thing is not to give up but make adjustments and improve your approach.

How to Handle Emergency Expenses

Emergency expenses are a fact of life, so they should have a place in your budget.

If you don’t currently have an emergency savings fund, look at your budget and see which expenses you can cut in order to kick-start your fund. Also, be sure to add savings to your budget as a line item. If there’s not currently room for savings in your plan, you may want to look for a way to increase your income, even if temporarily, so you can save some money for emergencies.

When it comes to envelope categories, you don’t necessarily need to carry around an envelope for this expense, since emergency spending doesn’t happen every day. But you’ll still want to separate your savings from your spending cash by putting it into a designated savings account.

How to Manage Online Payments

Physical envelopes aren’t a great solution for online transactions. You’ll want to skip putting money into envelopes for expenses you pay online, like your car payment or utility bills. Instead, consider checking your bank account to see if you have a digital envelope system available.

Whether or not you can place online payments in an envelope, you’ll still want to make sure you include them in your budget.

Alternatives to the Envelope Budget System

If the envelope budget system seems too complicated or too outdated, don’t fret. There are plenty of other tools you can use to create a budget and stick to spending goals, including:

• Budgeting apps
• A hand-written ledger
• A spreadsheet
• Complimentary banking tools

Depending on your preferences, including how much time you want to invest into setting up unique spending categories and tracking your progress, you might find success by using one or a combination of these tools on an everyday basis.