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How Does the Envelope Budgeting System Work?

One option for tracking spending each month is the envelope budgeting system. Divide cash into different envelopes that represent individual spending categories to budget. This approach can also be adapted for mobile apps.


Understanding Envelope Budgeting

Approximately 80% of Americans say they keep a budget each month according to a 2021 survey, and 88% say everyone should budget regularly.

Different ways to make a budget include zero-based budgeting and annual budgeting.

The envelope budgeting system is a cash-based system that helps people who struggle to stick to a budget to be more mindful and deliberate with their spending.Multiple envelopes, each representing a different budget category, are what you begin with.You assign a certain amount of cash to each category based on how much you anticipate spending in that category for the month.After the envelope is emptied of cash, you can’t spend any more money in that category until the new budget period starts.


How the Envelope Budgeting System Works

There are some specific steps to follow for setting up the envelope budgeting system, but it isn’t complicated.


Step 1: Add Up Monthly Income

You need to know your monthly income before you can begin using the envelope method to budget; this includes all the money you expect to bring in for the month. Your income sources may include salary, tips, commissions, self-employment income, interest, dividends, rents, royalties, alimony, child support, and pension or annuity payments.

  •  Side hustle earnings
  • Paychecks from a nine-to-five job
  • Investment Income
  • Alimony or child support payments, if applicable
  • Earnings from a part-time job or second job
  • Government benefits, if applicable
  • Stimulus payments or advance tax credit payments


Any one-time sources of income that you expect to receive for the month, such as tax refunds or rebates, may also be included.


Step 2: Set Budget Categories

These may include choosing which categories to put in your budget and the next step with envelope budgeting.


  • Groceries
  • Clothing
  • Auto fuel and oil
  • Entertainment
  • Dining out
  • Personal care
  • Household items
  • Pet care
  • Gifts

Typically, expenses for housing, utilities, insurance, and debt repayment are not included in envelope budgeting because they represent the fixed part of your budget—expenses that don’t change much or at all from month to month. You may pay these bills by writing a paper check, with your credit or debit card, or electronically via ACH (Automated Clearing House) transfer. Your cash envelopes should represent the different categories in that your monthly spending changes.


Step 3: Assign Budget Amounts to Each Envelope


After you have tallied your income and selected your budget categories, you will need to pick how much money to set aside for each one. For example, if you have $1,500 to spend in cash each month. An example envelope budget for 2020, based on average consumer expenditures, might look like this:


  • Groceries—$412
  • Auto fuel and oil—$131
  • Clothing—$120
  • Dining out—$198
  • Entertainment—$243
  • Personal care—$54
  • Miscellaneous—$76


You would be left with $266 if you spent a total of $1,234. You could put some of that money away for pet care, child-related expenses if you have kids, gifts, or charity.


Step 4: Spend the Cash on Each Envelope


After the cash is assigned to each envelope, budget it by spending it to cover expenses. Subtract the amount each time cash is taken from the envelope. Keep a running tab of your expenses by writing them down on the back of the envelope.

If you want the envelope budgeting system to work, you can only spend the money you have on hand. For example, if you have $412 assigned to your grocery envelope. If $412 is your entire budget amount for the month, you can spend about $95 per week. Once that money is gone, you can’t spend anything else until the new budget month begins.

If you take cash from another envelope, you might not have enough money for another budget category, so it requires discipline to not overspend.


Pros and Cons of Envelope Budgeting


Consider your current spending habits when deciding whether to use cash envelope budgeting. If you’re already disciplined about tracking your expenses, switching to envelopes may not be too difficult. Consider also where you tend to spend the most and whether paying in cash instead of using a debit or credit card makes sense.


You could save money by using a dining rewards credit card instead of cash when dining out, assuming that you pay your balance in full each month to avoid interest charges.


What is envelope budgeting?


The envelope budgeting system is a way to budget where you assign spending categories to individual envelopes and allot a certain amount of cash to each envelope to be used for spending in that category.


How do you set up a budget envelope?


Choose a spending category for the envelope, then decide how much money to put in it. Write the starting cash total on the outside and subtract each purchase amount from it to keep a running total of how much is left for the month.



How much money should I put in each envelope?


Choose a dollar amount for the category that reflects what you would spend monthly. The envelope should have $400 to $450 in it if you spend $100 a week on groceries.


The Bottom Line

Budgeting with envelopes, either real or virtual, is a cash-oriented approach that makes spending tangible but can be tedious. If you use cash, you can lose the rewards and security of using a credit or debit card.

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