Budgeting with an Envelope System

Envelope budgeting systems are not new. One day, after I came home from school in the early 1990s, I saw my mom with a stack of different envelopes next to her on the couch. She had written in large letters on the front of each envelope and tucked some cash inside each one. When we were out shopping later that week, she pulled one of the envelopes from her purse and used the money it held inside to pay for her purchase. Who knew that, years later, envelope budgeting would be something I used and now teach others how to use?

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What is a cash envelope system?

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A cash envelope system is one method of budgeting a person's money. Using a budgeting system with envelopes is an excellent way to make a specific plan for how to spend each dollar. Budgeting with an envelope system may also be called zero-based budgeting. This means that you only make a plan for the money you already have. With cash envelopes, you can only put the cash you currently have into the envelopes. You can not, for example, use money from a paycheck you have yet to receive. This type of budgeting helps people to live within their means and is excellent for all kinds of people.

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Envelope budgeting is simple enough that even young children can use this method to learn how to manage money. For example, when my kids were young, they each had three envelopes that they would use for any cash they received. One envelope was labeled Give, one was labeled Save, and the other was labeled Spend. If they were given five $1 bills, for example, they would put $1 in the Give envelope, $1 in the Save envelope, and $3 in the Spend envelope. The next time we headed to the toy aisle at Walmart or Target, they’d each bring their Spend envelope with them to see what they could buy. On the off chance that they chose not to buy anything, those $3 would stay in the Spend envelope. The next time they received money, they would do the same practice of putting cash in each of the three envelopes, adding to what was already there. In this way, they would build up their money.

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An envelope budget system works very similarly for adults, and it has become popular on social media platforms in recent years with the name cash stuffing. I even found myself watching countless videos of people stuffing cash into various envelopes to help them plan out their dollars each time they were paid. Adults may have more than just three envelopes like my kids did, and the envelopes themselves may have some bling, but the basics are still the same. All you need is cash and different envelopes, and you can create a plan for your money.

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How to Get Started

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The first step to budgeting with an envelope system is to figure out how to label your envelopes. Four general groups of envelopes would be for variable expenses, fixed expenses, debt payments, and sinking funds. Some common envelopes for variable expenses include grocery shopping, eating out, and fuel. You know you will spend from these budget categories each week or month, but the amount varies each time. Fixed expenses would be for things where the amount is the same each month, such as Rent/Mortgage, Cell Phone Bill, Netflix, and Car Payment. Sinking funds are things you want to save up for, like car repairs, vet bills, or travel. Check out this post on sinking funds to learn more. Lastly, envelopes can be used for debt payments like credit cards, student loans, or personal loans.

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Once you have labeled your various envelopes, it is time to add cash to them. How much cash do you need? You can start by asking yourself what you need to pay this week. Some will write a list on a sheet of paper with the various categories and the known amounts and add these on a calculator. For example:

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Eating Out $40

Groceries $100

Fuel $50

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These three categories total $190, so we will need at least this amount for this example. When I was growing up in the 1980s and ‘90s, my dad used to cash his paycheck each week at the bank. Most companies now offer direct deposit; however, people who use an envelope budget system usually need to withdraw cash in order to fill their envelopes. If I withdraw cash from an ATM or get cash back at the store, I will withdraw $200; however, if I withdraw money from a bank branch where smaller bills (like $5 and $10) are an option, that is even more helpful. Next, you can put those amounts you wrote down earlier into their respective envelopes. It is that simple! Each time you receive more money, you can go through this same exercise to determine how much you want to add to each envelope.

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What happens when it is time to spend the cash from your envelopes?

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Let’s say you go out to eat and the total comes to $15. You had $40 in the envelope to begin with. You hand the cashier $20 and receive $5 in change. You would put that $5 back into your Eating Out envelope, leaving you with $25. At the end of the week, you can reassess your envelopes. Do you still want to keep $25 in Eating Out for next week? Or do you plan to eat only food prepared at home instead? If you don’t need the $25 for eating out next week, you can take the $25 out of the Eating Out envelope and put it into a different envelope of your choice. It all depends on your priorities. At the end of each week and month, it is a good idea to reassess your priorities for what is coming up and how you plan to spend your dollars.

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After some time, you will begin to have cash left over in some envelopes, specifically ones that you are using to save up for something over time. What should you do with that cash? Cash for sinking funds can be deposited into a bank account. Some people choose to put sinking funds into a savings or high-yield savings account to earn even more interest. 

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Why is envelope budgeting a smart budget method to use?

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Let’s say you want to go out to eat this weekend, and you’d like to try the new sushi restaurant that opened nearby. You look in your Eating Out envelope but realize the money inside is not enough for sushi. You have two options with this budget method. Option one - the Eating Out envelope holds enough cash for a burger and fries, so you could skip sushi this time. Option two - you pull some money from your Travel envelope and add it to your Eating Out envelope. You decide to do this because you don’t have any planned trips any time soon, and you are really craving sushi.

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Option two allows you to stay within your spending plan's guidelines without sacrificing what you enjoy or creating debt. One important thing to note is that you would not want to pull cash from one of your fixed expense envelopes because you know that those things have to be paid this month. However, the variable expenses and sinking funds are typically areas where we can have a bit more flexibility in how much we spend and when. It is also important to remember that if you keep taking from the sinking funds, you’ll find it harder to reach your goal of having money set aside when it comes time for a car repair or travel.

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What if I buy something on my credit card?

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Can I still use an envelope budget system? Yes! Let’s be honest, it is so much easier to use a digital form of payment or to pay with a credit card. If you use a credit card to pay for your lunch, all you have to do is take the cash from the eating out envelope and put it in your credit card payment envelope. Then, you will want to deposit that cash from the credit card payment envelope into the bank account you use to make your credit card payment. This is one good way to ensure you are not creating credit card debt for new purchases. What if you pay your friend with Venmo to reimburse them for purchasing your movie ticket? You would deposit money from your Entertainment envelope into the bank account connected to your Venmo account.

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Do I have to carry all these envelopes all the time?

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Some envelopes, like fixed expenses, definitely don’t need to be with you all the time. Many people who use an envelope budget system have binders to hold all of the envelopes that they use frequently. For those who do not want to deal with carrying around envelopes or binders with envelopes, there is a solution! Use a digital system. 

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Using a digital version of envelope budgeting is easy. Instead of using cash to pay, you can use a debit card. And instead of using physical envelopes, you can use a digital envelope-based budget system. There are a few apps that will help you to create a plan for your money by allowing you to create your own “envelopes” or categories (some apps even call these ‘buckets’). The benefit of having a digital envelope budgeting system is that you do not need to withdraw a lot of cash from the bank. It is much easier to check one of your categories in an app to see how much money you still have available to spend. You can easily pay for transactions with your debit or credit card without having to deposit cash into the bank to cover those purchases. Another benefit to paying for things with a debit card or credit card is that there are often things like cash-back rewards, whereas when paying with cash, there are usually no additional perks.

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One word of advice when starting off with cash envelopes, whether physical or digital, is to keep the number of envelopes or categories small. If you have too many envelopes or categories, it can be overwhelming. For instance, when shopping at a big-box store like Walmart or Target, you can buy various items from different categories: clothes, groceries, personal care, and household items. You would have to pull cash from multiple envelopes if using physical envelopes. Using an app with digital envelopes or categories is easier since you can usually split a transaction in an app. But if your categories or envelopes are broader, your shopping trip will be simplified. For example, you could have an envelope simply labeled Shopping. Over time, you may decide to be more granular or detailed in your envelopes or budget categories, but it is best to start with something simple. If kept simple, you are more likely to remain motivated along your budgeting journey.

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Looking for budgeting support? Get started with Amanda today!

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If you enjoyed this article, sign up for a free 35-day trial of MyBudgetCoach. The virtual version of Amanda will walk you through setup of a digital envelope system, and she is available for video calls at an additional cost.