:max_bytes(150000):strip_icc()/manwriteslistforenvelopesystem-cd256424bb404478b6101e22c68bac87.jpg "Is the Envelope System the Best Budgeting Method? (1)")
Finding the right budgeting system can take the hassle out of managing your money. The envelope system is a popular option for creating a household budget and it's the one advocated by personal finance experts like Dave Ramsey. But how does the envelope system work and is it the right choice for you? If you're looking for a new approach to budgeting, here's what you need to know.
What Is the Envelope System?
In a nutshell, the envelope system is what it sounds like—dividing up your monthly or weekly funding budget into various paper envelopes.
Each envelope is assigned to a specific category, and is designed to manage discretionary expenses. Discretionary expenses, also called variable expenses, are amounts you spend every week or month but might change from month to month.
How to Set Up an Envelope System Budget
Learning how to budget using envelopes isn't that difficult, even if you've never budgeted before. It's very similar to making any other kind of budget, with a twist. Here's a checklist for getting started:
1. Establish Budget Categories to Assign Each Envelope
The first step in using an envelope system is deciding which expenses to include in your envelopes. This part of the process is personal—you're tailoring each envelope to your specific budget and spending.
Your envelope labels might include general categories such as groceries, gas, clothing, entertainment, and savings, for example.
Note
Review last month’s bank statement to figure out your categories.
2. Allocate Dollar Amounts to Each Envelope
Once you have envelopes for the expenses you want to manage, decide how much money goes into each. This should be easy to do if you've already added up your income for the month, then subtracted the amounts you need to set aside for your fixed expenses. If you haven't done that yet, hit pause and tackle that task.
If you’re paid weekly or biweekly, you may need to look at budgeting on a weekly level.
So let's look at the list of example envelopes from earlier. Assume that you have $1,000 total to fill up those envelopes for the month. Your allocation might look like this:
| Groceries | $400 |
| Gas | $150 |
| Dining | $100 |
| Clothing | $100 |
| Entertainment | $50 |
| Gifts | $25 |
| Savings | $25 |
| Personal Care | $50 |
| TOTAL | $1000 |
The sum total of the envelopes should reflect the sum total of cash you have to assign.
On the front of the envelope, write down the starting amount you have to spend for that budget category.
3. Withdraw Cash to Fill Your Envelopes
At this step, you withdraw the cash you need to fill your envelopes. Ideally, you add the cash you need to each envelope at the beginning of the month. Then for the rest of the month you take money out of the relevant envelope when you need to make a purchase in that category.
If you're planning to withdraw cash for your envelopes from an ATM, check your bank's maximum daily withdrawal limits first. You may need to visit a branch instead to get the total amount of cash you need. If you don’t have enough money in your account for the month, set up a weekly envelope system.
Note
Keeping large amounts of cash in envelopes at home can present the risk of theft or loss; store envelopes in a safe place. As well, never pay bills by sending cash through the mail.
4. Track Your Spending for Each Envelope
If you've divvied up the cash in your envelopes you're ready to start spending money for the month.
To make the system work, keep a running total of how much money you have to spend for each category. Each time you withdraw money, subtract it from the amount to get a running total of cash remaining. Take the envelope with you when shopping, or if you don't have time to jot down how much money you've pulled out of your envelope before making a purchase, store the receipt and come back to it later.
Using the Envelope System With Credit or Debit Cards
The envelope system may be harder to use if you’re paying all of your expenses with a debit card, or use a credit card that you try to pay off monthly. If you primarily use credit or debit cards, there are web and phone apps that rely on a virtual envelope method, such as Mvelopes.
Or you can create your own system in the following manner:
- Establish budget categories and assign an envelope to each category. Write on each how much you intend to spend for the month.
- Always request or accept receipts when using your card, and add receipts to the envelope at home. Write each receipt amount on the correct envelope’s exterior to keep a running total of expenses.
- Don’t spend more than the amount you’ve assigned.
Note
Avoid the temptation to spend on credit. If an envelope runs out of money in a particular category, it may be easy—and tempting—to keep spending using credit. But that can lead to debt, which can blow your whole budget out of the water. So stick with just spending what you already have, whenever possible.
The Bottom Line
The envelope system isn't hard to master, but only spend what's in each envelope. Once the money in a specific envelope is gone, it's gone for the month. You can't spend more in that category until the next month starts or dip into other envelopes. The purpose of using envelopes to budget is to stay in control of what you're spending. If you’re spending more than you have, change your spending patterns or your budget.
Remember that you don't have to spend each envelope down to $0 each month. Cash left over means you spent less than you planned. Pay down debt, or add leftover cash to your emergency fund. Giving any extra dollars a purpose is key to ensuring the money doesn't go to waste.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
North Dakota State University Extension. "Use the Power of Envelopes to Take Charge of Your Spending."
Consumer Financial Protection Bureau. "Budgeting: How to Create a Budget and Stick with It."
North Dakota State University. "Using Envelopes to Track Expenses."
Insights, advice, suggestions, feedback and comments from experts
Introduction
As an expert in personal finance and budgeting, I have extensive knowledge and experience in various budgeting systems, including the envelope system. I have studied and implemented different budgeting methods, and I can provide you with valuable insights and guidance on how to effectively manage your money.
The Envelope System: An Overview
The envelope system is a popular budgeting method advocated by personal finance experts like Dave Ramsey. It involves dividing your monthly or weekly funding budget into different paper envelopes, each assigned to a specific expense category. The envelope system is primarily designed to manage discretionary or variable expenses, which are amounts that may change from month to month.
Setting Up an Envelope System Budget
Setting up an envelope system budget is relatively simple, even if you've never budgeted before. Here's a step-by-step guide to help you get started:
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Establish Budget Categories: The first step is to decide which expenses to include in your envelopes. This is a personal decision, and you can tailor each envelope to your specific budget and spending habits. You can use general categories such as groceries, gas, clothing, entertainment, and savings. Reviewing your previous month's bank statement can help you identify your spending categories.
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Allocate Dollar Amounts: Once you have determined the expense categories, you need to decide how much money to allocate to each envelope. This can be done by adding up your income for the month and subtracting the amounts needed for fixed expenses. If you are paid weekly or biweekly, you may need to budget on a weekly level. Allocate the appropriate amount of cash to each envelope based on your budget.
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Withdraw Cash: After allocating the amounts, withdraw the cash you need to fill each envelope. Ideally, you should add the cash to the envelopes at the beginning of the month. Throughout the month, you will use the cash from the relevant envelope when making purchases in that category. Be mindful of your bank's maximum daily withdrawal limits and store the envelopes in a safe place to avoid theft or loss.
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Track Your Spending: To make the envelope system work effectively, keep a running total of how much money you have left in each envelope. Subtract the amount spent from the initial amount to track your remaining cash. Take the envelope with you when shopping, or store receipts and update the envelope totals later.
Using the Envelope System with Credit or Debit Cards
If you primarily use credit or debit cards for your expenses, using the envelope system may require some adjustments. There are web and phone apps available that simulate the envelope method, such as Mvelopes. Alternatively, you can create your own system by following these steps:
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Establish Budget Categories: Assign an envelope to each budget category and write down the intended spending amount for the month on each envelope.
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Keep Track of Expenses: Always request or accept receipts when using your card and add them to the corresponding envelope at home. Write the receipt amount on the envelope to maintain a running total of expenses.
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Avoid Overspending: It's crucial to stick to the allocated amount for each category and avoid the temptation to spend on credit. If an envelope runs out of money, refrain from using credit to continue spending. This practice helps you stay within your budget and avoid accumulating debt.
Conclusion
The envelope system is an effective budgeting method that can help you manage your money and stay in control of your spending. By dividing your budget into different envelopes and tracking your expenses, you can make informed financial decisions and achieve your financial goals. Remember to adjust the system to fit your specific needs and preferences.
If you have any further questions or need additional guidance, feel free to ask!
