Envelope Budgeting System: What It Is & How To Use It (easily)

The Envelope System is a great method for saving money.

It works by allocating money for certain categories like eating out, shopping, movies, and so on in envelopes. Once you spend the money in the envelope, that’s it for the month. You can’t spend more.

It’s a great system to use if you’re in debt, because it forces you to be actively aware of your spending — but is it all it’s cracked up to be?

Let’s break down exactly how the Envelope System works, why it’s good, and some of the drawbacks from utilizing it.

What is the cash envelope method?

The cash envelope system is a simple means of controlling your spending. Every month, you have a set number of envelopes, each one dedicated to a certain type of expense. You allot a set amount of money to each envelope, and that’s the money you have to spend on that expense for that month. Examples of expenses could include:

• Housing (rent, utilities, etc.)
• Food (grocery store purchases, takeout, dining out, etc.)
• Entertainment (streaming video subscriptions, books, etc.)
• Student loans
• Savings

While the traditional envelope system uses physical envelopes and actual cash, there are more modern approaches. Tools like Mvelopes or YNAB take the envelope system online, following the same principle but allowing you to track your spending digitally. This can be helpful since many types of expenses — from Uber rides to student loan payments — cant be paid in cash.

Once you spend the money for that month, that’s it: You can’t spend more.

If it’s really an emergency, you can dip into other envelopes—like your “eating out” envelope—but you’ll have to cut back until you replenish that envelope.

One of my friends, for example, has been carefully watching her spending for the last few months. When she started tracking it, she noticed that she was spending an unbelievable amount going out every week. So she came up with a clever solution to control her discretionary spending.

She set up a separate bank account with a debit card. At the beginning of each month, she transfers, let’s say, $200 into it. When she goes out, she spends that money. And when it’s gone, it’s gone.

These are training wheels. Build the habit first. Systematize it later.

Tip: If you set up a debit account like this, tell your bank that you don’t want them to allow you to spend more than you have in your account. Say, “If I have only thirty dollars in my account and I try to charge thirty-five dollars on my debit card, I don’t want your system to let me.” Some banks can handle this request. If you don’t do this, you’ll likely run up tons of overdraft fees.

What are the benefits of cash stuffing?

You may also see the envelope method referred to as cash stuffing or cash envelope stuffing — but it’s all the same thing. Whatever it’s called, this approach has some clear benefits that can help make it easier to establish and stick to a bulletproof budget. Following this strategic method, you can:

• Set and reach clear savings objectives and achieve them effectively through deliberate, regular contributions toward your goal. By proactively allotting a set amount of cash toward your goal every month, you avoid spending your money elsewhere and then having nothing left over.
• Avoid impulsive spending. Once you’ve used up the money in a given envelope, that’s it for the month. You (theoretically) should wait until next month for more. For people who tend to spend impulsively (and then experience buyer’s remorse), this can be a way to improve spending habits.
• Take a hands-on approach to money management. This approach turns money management and spending into a tangible process. If you go with the old-school method of using physical envelopes, you’ll become very aware of every dollar you spend every time you reach into an envelope for cash.
• Become more disciplined in your relationship with money. By requiring you to consciously plan and think about how you spend your money, cash stuffing teaches discipline. Ultimately, it can help you gain better control over your finances, removing the fear associated with money when you feel like your finances are out of control.

The cash system’s strength lies in its psychology.

It doesn’t require you to completely cut out the things you love — like your morning latte.

By allotting envelopes for both necessities (like rent) and fun stuff (like entertainment), you can practice conscious spending:

You spend on your money dials — things you value and enjoy — instead of denying yourself all pleasures.

How to start using the cash envelope system

Another benefit of the cash envelope system is how easy it is to implement. You don’t have to tinker with complex Excel spreadsheets or pay for pricey software to get started.

You can begin cash stuffing with your next monthly budget. Here’s how to set yourself up for success.

Whatever system you want to use to divvy up the money is fine. Just decide how much you want to spend in major categories each month. (Pick your Big Wins to start.) 

Put the allotted money in each “envelope.” When the envelopes are empty, that’s it for the month. You can transfer from one envelope to another . . . but that money is coming out of another category, so your total spending doesn’t actually increase.

Some of my nerdier friends even get more detailed with their systems. One of my readers created this table:

	Eating out	Taxis	Books
Times per month	12	8	5
Amount per event	$23	$9	$17

“Each month, I try to cut the quantity and amount I spend on something,” he told me. In less than eight months, he cut his spending by 43 percent (he knew the exact figure, of course). In my opinion, that level of analysis is overkill for most people, but it shows how detailed you can get once you set up a Conscious Spending Plan.

Here’s a more detailed breakdown.

Create a budget or conscious spending plan

Before you start envelope stuffing, you’ll need a clear budget. Following the conscious spending model, your budget should cover necessities and the “extras” you don’t need but that improve your quality of life. Your overall budget can be divided into four buckets:

• Fixed costs like rent, utilities, food, insurance, health care, debt repayments, and transportation
• Investments like funds, stocks, and bonds
• Savings like cash savings or retirement savings like a 401(k) or Roth IRA
• Guilt-free spending on the “wants” that make everyday life great, like your Netflix subscription or luxury items you love

With your budget sketched out, you can go on to build a budgeting system — in this case, the envelope method. If you’re creating a budget for the first time, check out this easy guide for beginners.

Even if you don’t stick with cash stuffing long term, having a clear budget planner will help you with your overall money management.

Create spending categories 

Following the conscious spending model, create spending categories within your budget. Let’s say you have your “savings” bucket. You might further divide this into three categories, like saving for an emergency fund, saving for special occasions like birthdays and holidays, and saving for a specific goal like a car. Each of these secondary budget categories will get its own envelope later.

Set appropriate spending limits for each category

With your conscious spending plan hammered out and your spending categories defined, you can go on to answer the big question: How much will you allot to each category? In some cases, this will be dictated by external factors. Your fixed expenses like rent and car payments aren’t negotiable, for example.

Two popular budgeting approaches for divvying up expenses are the 50/20/30 and 70/20/10 rules. The 50/20/30 principle means allocating 50% of after-tax income to necessities, 20% to savings and debts, and 30% to the rest. The 70/20/10 rule means allocating 70% toward expenses, 20% toward savings, and 10% toward giving.

These aren’t hard-and-fast rules, though, and you have the freedom to establish your own guidelines. The point is to cover all four spending buckets (fixed costs, investments, savings, and guilt-free purchases) and then set a reasonable limit for each category (as well as the secondary envelope categories within that category). Each person’s budget is unique.

Fill your cash envelopes

Now for the fun part: cash stuffing! If you’re going old school, you’ll need envelopes, something with which to label them, and cash. This raises one drawback of the method: You’ll have to go to the ATM to withdraw cash for your envelopes. However, as mentioned, the tangible act of taking money out of the pouches is part of this method’s success. It’s a psychological trick, making you fully appreciate every dollar you spend.

Alternatively, you can use a tech tool like Mvelope to digitally allot enough money to your various virtual cash envelope wallets. This can be convenient, especially for expenses paid online. Some modern budget apps can also be linked to your bank account’s credit card or debit card to automatically track spending. However, these extras can detract from the psychological power of the original envelope method.

Roll cash over into the next month or adjust spending

When you first set up the envelope method, create a budget that leaves you at zero at month’s end — meaning every dollar allocated to your four buckets should be spent. As you move forward, you may have cash left over at the end of the month. For example, maybe you canceled that Amazon Prime subscription you never used, joined a coupon program to save money on groceries, or paid off your car.

When this happens, it’s time to adjust your budget and how you allocate money to your envelopes. You can either adjust your spending — for example, by giving yourself more in the guilt-free category — or roll your cash over into the next month. This can help create a useful buffer for the future.

Taking control of your financial future

A cash envelope budget is one of the many tools you can use to improve money management and achieve your financial goals. With its psychological impact, it’s a great way to avoid overspending, which can be great for those who struggle with how to save money (or find themselves living from one payday to the next).

This approach is also about giving yourself greater agency over your money, demystifying budgeting, and breaking it down simply. It also allows for conscious spending, ensuring you don’t have to deny yourself your favorite pleasures. Ultimately, this will foster the mindset you need to achieve your rich life. Learn more about how it works with our six-week program, which you can find in the I Will Teach You To Be Rich book.

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