What Is The Envelope System? Explanation and Tips To Help You Manage Your Money



What Is the Envelope System/Method?

With the envelope system you use cash for different categories of your budget, and you keep that cash in envelopes. You can see exactly how much money you have left in a budget category just by looking in your envelope. It is a simple way to manage your money and keep your expenses on track.


Guideline and Additional Envelope System Guidelines & Tips

  • Use the envelope method for 3-5 variable spending categories

  • Make a plan for handling online shopping

  • Use a credit card for remaining expenses and pay it off monthly

  • Do nothing with fixed expenses already on autopay

  • Track every single cash transaction using a budgeting app or your Notes app

  • Keep $20 on hand at all times in case you forget your envelopes


How the Envelope System Works

You can use an envelope for every item in your budget. However, it’s a good idea to use the envelope system for items that bust your budget, or you find yourself spending way more than expected. These include groceries, restaurants, entertainment, gas and clothing.


Here are some main spending categories that can be used for the Envelope System:

  • Food (Groceries)

  • Dining (Restaurants)

  • Clothing (Retail and Online)

  • Shopping (Target, Walmart, Etc.)

  • Miscellaneous (Any Additional Money Spent During The Month)

Best of all, it is easy to start and you don’t have to save up any money to begin using the envelope system! You work with what you already make!


Here is an example for Groceries with the Envelope System:


- Your budget is $500 a month for groceries

- From your first paycheck of the month, take out $250 from your bank account and put that $250 in cash in an envelope.

- On that envelope, write "Groceries."

- When you get your second paycheck, do the same thing again, and put that $250 in the envelope too.

-There is your $500 food budget for the month. That's it!


No money comes out of that Groceries envelope except to pay for food at the grocery store. If you go food shopping and leave the envelope at home by mistake, go get your envelope. Or better yet, plan to go grocery shopping with your list in hand and your envelope. You can also keep $20 cash in your purse or wallet no matter what, plus a credit card and debit card — only for the ATM. Only do this if you know you will not use the cards for other purchases.


Make sure you take enough money with you to cover your groceries for that trip. If you take $150 cash and your total comes to $160, take some things out of the cart and put them back. This can be really hard; but it’s better than going over in your grocery category and breaking your whole budget for the month. Make sure you also put any change you get back in the envelope. The best way to manage sticking to your Grocery budget is to make a list before you go to the grocery store and stick to the list.


When your money is gone, it’s gone.

If you want to go to the store but don’t have enough money, see what you have in the fridge and pantry. You'll be surprised what you can put together. Go through what you have on hand to make dinner without having to run to the grocery store. This is a great way to really get intentional about your spending and make sure you also aren't wasting food.


Reward Yourself

If you have money left in an envelope at the end of the month, that's awesome! You came in under budget! That’s the best feeling possible when budgeting. You should celebrate! Reward yourself by going out to dinner at the end of the month, or put the money back into the grocery envelope, and roll that extra money over to next month so you have a larger food budget. This is when you can incorporate extra treats so you have them on hand for the next month!


Rewarding yourself will help keep you motivated!


Stick To The Money In Each Envelope

Do not borrow from the other envelopes. When it comes to the envelope system, it will be tempting to move cash from one category to another. If you use up all the money in your Restaurants envelope—you may feel the urge to grab that other envelope in your wallet marked "Clothing."


This is why we recommend having an envelope marked "Miscellaneous". You can keep this in your purse/wallet in case you run out of money. However, keep in mind, when that "Miscellaneous" money is out, it is out for the month!


Additional Tips

If you have a major issue in the middle of the month or something happens and you have absolutely no choice but to shift your envelope funds, you may have to dip into your emergency fund.


This can really take time and discipline to get used to. The first month is often the hardest. You will find over time though that when you stick to this method and really think about what you're buying you may not want to actually purchase unnecessary things.


Remember, the envelopes are designed to fight against overspending. They can help you manage your money better. Put the envelope system to work for you and realize what you're actually spending money on.


The envelope system is designed to control your spending and help you stick to your budget.


Online Spending With The Envelope System


In addition to envelopes filled with cash (food, dining, clothing, shopping, miscellaneous). You can make an envelope called “Online”. This one can be a separate expense or it doesn’t start with any money in it. For online purchases, you can use that one credit card specifically for online purchases.


Immediately after shopping online, take money from one of the corresponding cash envelopes and transfer it to the envelope for online spending so you hold yourself accountable for that purchase.


Here’s an example:

  1. You buy a clothing item online for $40

  2. Take $40 out of the “Shopping” envelope

  3. Put the $40 into the “Online” envelope

You can then take the money from the “Online” envelope to your bank or use it to fund the other envelopes when it’s time to fill the envelopes back up.


If you don't want to use a credit card, you can use prepaid cards or gift cards to shop online while on a cash budget.


It can be difficult to begin with, and you can make adjustments as you go; but the Envelope System is a great and easy way to manage your money.


More Budgeting Articles

What Is A Budget & Do I Need One?

Wants v. Needs Budgeting

5-Step Personal Budget


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