How to budget with the envelope system


Budgeting with envelopes

The cash envelope budgeting system is very basic, but generally a very successful way to make a budget. It is a bit primitive in our technologically advanced society. But most Americans are in debt up to their eyeballs, largely due to the fact that technology has made it very easy to go in debt. So, if primitive works, why not do it?

  1. I would suggest paying all of your BILLS (Mortgage, Electric, Phone, etc.) from your checking account, and then I would use the envelope system for the remaining money.
  2. Make your list of items that you need to budget for (groceries, gas, entertainment, clothing, etc.). For this system, I would suggest making the categories as specific as possible.
  3. Now that you have a list, estimate a monthly or bi-monthly dollar amount that you will need next to each item. If you don’t have good records of your spending, this may take a couple months to get this right.
  4. Buy a box of envelopes, get out a big, stinky Sharpie marker and write a name on each envelope (groceries, gas, entertainment, etc.).
  5. Go grab the cash from the ATM and fill up each envelope with the allocated amount. The key to this system is that when the envelope is empty, you are FINISHED spending for that period. It forces you to plan ahead based on how much money is allocated.

I think it is a good idea to create a MISCELLANEOUS envelope, I promise that you will find something to use it on that you had not planned and if you don’t, then let it keep getting bigger until you do. Because you will use it eventually.You will have to make adjustments the first few months, but just start somewhere and keep tweaking it until it is just right.

If the envelope system of budgeting isn’t your thing you may want to check out some of the free budget software that is available. Or try out one of the free household budget templates.

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21 Comments
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  1. Bob, nice write-up. We’re using this for certain budget categories that we find difficult to rein in, like eating out, groceries, and “blow money”.

  2. Maggie Shaw

    What about budgeting for credit cards using the envelope system? Does that even make sense to do? Perhaps putting in mock money and taking it out whenever you charge something. That is my most feared expense because I always end up spending far more than I want or need to.

    • Brian McOuat

      Maggie, my best advice for you, get rid of the credit card. Having a paperless trail of money allows you to spend very lavishly without the genuine feel of falling very heavily into debt. If you have come to this website you are already searching for a way to keep your spending in check. Holding a credit card allows you to do just the opposite. You may substitute a bank debit card for anything that requires a credit card. This information comes not only from me but from another successful money management program. This is one of the first steps to getting out and ahead of debt.

  3. @Maggie

    I think you mean using your Credit card to make the purchases, then paying it off at the end of the month. If not let me know… But if that is what you are referring to, I would be very careful, because for what ever reason the average person spends (I think I remember hearing this) about 15% more when they use a credit card than cash. So using your “mock money” idea may very well work – just be careful and keep me updated

    • hi bob! i love reading your articles. I’m learning a lot from them. I am starting with the envelope budgeting and i hope i can stick with it

  4. We have started using the envelope system this past month, and I bought a great coupon wallet at Target that works much better than the individual envelopes (which I was carrying around in my purse and were getting all chewed up)This works great!

  5. @Melissa
    Good to hear! That is a good tip, thanks for sharing

  6. Prov 24:3-4 ‘By wisdom a house is built, and by understanding it is established; and by knowledge the rooms are filled with all precious and pleasant riches.’

  7. Using the envelope system was one of the best things my wife and I ever did. I think it is great because it makes you proactive instead of reactive. As you spend, you emotionally feel and see the money leaving, so you make better decisions along the way. You don’t even have to track it, just look in the envelope. It is so much better than the old cycle of: 1. spend on plastic, 2. feel vaguely guilty but enjoy the denial, 3. reconcile at the end of the month with Quicken and find out we totally blew the budget again…

  8. @Phil
    I am really glad to hear that!! I think your testimony will be good encouragement to the readers who are a little leary of the whole envelope budgeting thing… thanks for sharing

  9. You should read the book, Money for Life. It talks about the credit card spending. It adda the fee in a seperate envelope, but makes you pay for the item in your envelope system. If you charge clothes then it has to come out of your clothing envelope. This allows for the cards not to have any more expenses placed on them.

  10. I just lost 40% of my net income due to my exhusband losing his job and the child support ending. Frankly, I don’t make enough to get by, but thankfully I have a few months worth in savings. Since I really have to tighten up as much as possible, I am going to start using the envelope system. I plan to use a coupon organizer to separate the money. I’m only going to carry around the weekly amount so I don’t have a huge wad of cash that could potentially go missing. The reason I intend to carry all of my categories around is because I have to do my shopping when I get spare time. A little planning would probably fix that but until that happens, I’m going to do it this way. I’m excited to see if it works for me.

  11. I think the envelope system is a great idea for folks who don’t feel they have control of their spending. I do take issue with the statistic that people spend 15% more when using a credit card (and I’ve read that elsewhere as well). How in the world would the data be collected for this? The only way I can imagine is through cash register receipt records. When I make a purchase, whether it’s in a grocery store, drugstore, restaurant, or wherever, if the cost is relatively low (say under $20), I pay cash. But if it’s more, I pay with a credit card since I don’t carry a lot of cash. I think this tendency holds true for many folks, and if that’s the case, then the data is worthless in terms of determining what people spend when using cash vs a credit card.

  12. Lara,
    I’m curious to see if you using a credit card for purchases over $20 or so instead of a debit card is a common American thing. I only use a credit card for purchases that are rare or expensive, travel, or possibly an online purchase. I rarely carry cash at all, I use my bank debit card for everything since there is no charge for that and it keeps the credit card spending down to nil.

  13. HI there. Ok so you are saying the rent, elec and phone first. Afterwards the car and insurance then food?

    Im confused.

  14. I do not have any idea with that budgeting with an envelope before I read this one post. This post can be really helpful for those who really need to save money and trying to avoid overspending just like me. Thanks for it!

  15. I am going to try this!! What a great idea!

  16. I am 19, boyfriend 22 – I just stumbled across this message board about envelope budgeting. I started using envelopes about a month ago. Good feeling to see this suggested on the internet. We must be doing something right(: You couldn’t even imagine how much less stress we feel with this process! We are both very young, and excited to start saving early! To anyone who is considering this, DO IT! If it will work for a very young couple, it will work for anyone! We even have what we call a “party budget” – How much we can spend on drinks, smokes, etc. AWESOME! And when we do buy booze/cigarettes now, we arn’t thinking oh man this is gonna hurt when cable is due. Only set back I have noticed that a coupon organizer would be alot more easy for a purse than big envelopes(:

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