Envelope budgeting is a simple, old-fashioned yet highly effective way to manage your money.
Unlike when you use credit cards or debit cards to buy items in fluid spending categories, using cash in envelopes gives you a real-time sense of how much money you’re spending and what you’ve got left in each category.
Table of Contents
1. Create Your Monthly Budget
The first key to successfully using an envelope budgeting system is to create your budget. If you haven’t done so already, there are budgeting apps like YNAB or printable budget worksheets you can use to help you.
If you’re having trouble getting an idea of what you might spend in specific categories, here are some average budget numbers you can use to give you some ideas/perspective.
Experts suggest you create a new budget at the beginning of each month. This is because some expenses are more sporadic, such as birthdays or holidays.
If you’re not interested in making a new budget each month, simply take what you spend annually on sporadic expenses and divide it by 12 to get your monthly budget number.
Keep in mind that you will need to put some money aside each month to cover those non-monthly expenses when they arrive.
2. Identify Fluid Expenses
Now that you’ve created your budget you can identify fluid expense categories that may be more suited for the envelope budgeting system. Some ideas include:
- Dining out
- Fun money
- Personal care money
Some people also use envelope budgeting to save money for other items such as car repair or house repair. That way the money is sure to be there when you need it.
Note that it might take some practice for you to decide which categories you will and will not use envelopes for. Personally, I don’t use envelopes for gas money, although some people do.
I just find it too much of a hassle to go into the gas station when I can pay at the pump. As you get used to envelope budgeting you’ll figure out which expenses fit best with your envelope system too.
3. Withdraw the Cash on Payday
When payday comes it’s time to withdraw the cash. Add up all of the budget money you’ve identified for your envelope spending.
When you go to the bank, it’s important to have the bank teller give you the cash in the denominations you’ve got budgeted for each category so you can fund each envelope correctly.
Another option is just to be sure that all categories have some type of set number that can be divided into twenty dollar bills and hit the ATM.
That could be easier, especially if you can’t always make it to the bank during business hours.
Now that you’ve got the cash, divide it up and put the designated amounts for the month in each envelope.
4. Use the Cash as Specified
This is the important part! If you’re used to spending without thought in your envelope categories you may have to retrain your brain a bit.
I suggest having some cash (not all) from each category with you at all times in case there’s an unexpected expenditure. That way you’re sure to always use the cash on hand for the coordinating expense.
It’s important that you avoid credit/debit card usage altogether and use the cash you’ve designated for each category. It’s also important to pace yourself.
Remember that the cash in each envelope has to last for an entire month and that you should avoid temptation to go on a spending spree. And consider the denomination effect.
What that means in a nutshell is that it’s often more difficult for people to spend if they have to break a larger bill to do it.
For example, if you’re considering a fast food run you might think a bit longer about making that expenditure if you have to break a $100 bill as opposed to a $20 bill.
If that’s the case with you, keeping your envelope cash in larger denominations might be an added benefit to your envelope budgeting system.
What if I Run Out of Cash in a Specific Envelope?
If you run out of money in a specific category, you’ve got two options.
Die-hard envelope budgeters would say “Tough bounce. You’re done spending in that area for the month and you’re going to have to deal with that fact.”
And “dealing with that fact” could go a long way in helping you to be more budget-conscious. More relaxed envelope budgeters would say that you could take money from another envelope category to use in the category you’ve spent all of the money in.
However, doing so can be a slippery slope, my friends. It can encourage you to not stick with your budget and it could snowball into you using a lot of other designated budget cash in areas it wasn’t meant for.
Remember that the whole point of using an envelope budgeting system is to keep you disciplined with your budget and spending. Don’t negate the benefits of the system by choosing to disregard the limits you’ve set.
And if you’re finding that you’re continually running short in a particular area, you may need to redo your budget and change the dollar amount for that category.
But do have a plan for if you run out of money in a category. Decide which option you’ll choose should you run out of cash in a specific envelope. Just be sure you’re keeping yourself on track with your budget as a whole.
Why You Should Try Envelope Budgeting
There are several benefits to an envelope budget system that makes it worthy of a try.
First, it helps you stick to your budget. So many times people have a sort of “black hole” in their spending where money seemingly disappears and they don’t know where it goes.
Most times it simply goes to small expenditures that add up to a LOT of money. Coffee runs here, big box store runs there. An envelope budgeting system is a simple system that forces you to make a concrete plan for your money.
It’s a fool-proof system if you follow it. Visually seeing the cash leave your hands can be more realistic than swiping a card, encouraging you to spend less.
In addition, when you’re paying with cash there are no worries about checking overdrafts or running up a credit card balance you can’t pay off.
And if you’re worried about carrying cash around you can try these alternatives to traditional envelope budgeting.
Alternatives to Traditional Envelope Budgeting
We’re living in a digital age, and that means there are digitalalternatives to a traditional envelope budgeting system. Here are two of our favorites.
QubeMoney is an app with an online bank account where you can put your envelope budgeting money. The app lets you create cloud-based envelopes for each of your spending categories.
After you transfer the specified amount into each category, you’ve got to transfer it back into your QubeMoney bank account before you can use it.
For instance, if you want to go out to eat you can transfer $100 from your QubeMoney dining out envelope to your QubeMoney bank account. Bonus feature: If you go out to eat and spend less than that $100, QubeMoney will transfer the remaining amount back to your “dining out” envelope.
Your bank account will stay at zero at all times unless you instruct it differently, helping you stay within your budget guidelines. See our QubeMoney review here.
Mvelopes is shutting down at the end of 2022 so you’ll want to see these Mvelopes alternatives.
Mvelopes works similarly to QubeMoney. You don’t have a separate bank account with Mvelopes. Instead, you tie Mvelopes to your credit and debit cards and it takes money from the specified Mvelope when you make a purchase.
It puts the money into your credit card Mvelope so you have the cash to pay it off at the end of the month. Bonus: Mvelopes has a feature that allows you to set and work to achieve financial goals as well.
So if you’re hesitant about carrying cash or paying with cash, you can try one of these alternatives to traditional envelope budgeting. Now here are some other tips to make your envelope budgeting experience successful.
See our full review of Mvelopes here.
Other Envelope Budgeting Tips
An envelope budgeting system works if you work it right. Here are some tips for helping you to do that.
First, start by choosing categories that are the toughest for you to stick to your budget in. Rein those areas of spending in first and then add others if necessary.
Second, make a plan for any leftover money. If by chance you’ve got leftover money in one or more envelopes at the end of the month, what will you do with that money?
Use it to pay off debt? Or to build wealth? Maybe you can save leftover money each month for a dream vacation. Or give it away to a favorite charity.
If you’re using the system correctly you could very well have money left over each month.
Lastly, if you try an envelope budgeting system give it some time to work. It’s unlikely your first month will go smoothly. You will probably need to adjust your categories and habits.
The first three months will be about tweaking the system and give yourself a total of six months to get into the groove of using the system.
By six months you’ll have smoothed out any wrinkles and you’ll be feeling good about your budgeting system.
An envelope budgeting system can be a great tool for helping you gain more control over your money. Have you ever tried envelope budgeting?
Did it help you manage your money better? Feel free to share your experience in the comments section.