How to Budget Using The Envelope System

This tactile budgeting approach relies on cash and envelopes to plan your spending each month.

Lauren SchwahnDecember 20, 2019
On a similar note...
On a similar note...

Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own.

The envelope system is a budgeting method that allows you to physically portion out your monthly income toward different spending categories. The concept is simple: Take a few envelopes, write a specific expense category on each one — like groceries, rent or student loans — and then put the money you plan to spend on those things into the envelopes.

Traditionally, people have used the envelope system on a monthly basis, using actual cash and envelopes. More recently, people have adopted digital methods, including spreadsheets and apps like Goodbudget and the Mvelopes.

How the envelope system works

Start by thinking about the types of expenses you have and sort them into categories. You get to decide how broad or specific to be here. You can have a general “going out” envelope, for example, or you can have a “movies” envelope, a “restaurants” envelope and a “drinks” envelope.

Next, label an envelope for each category and fill it with the amount of cash you’ve allotted for that expense. You can divvy up your money as you see fit, but a good place to start is with the 50/30/20 budget. This means you put 50% of your after-tax income toward needs like rent and groceries, roughly 30% toward wants like travel and eating out, and at least 20% toward savings and debt repayment.

Say you take home $3,500 a month. This is what your budget might look like:

  • $1,750 in your needs envelopes.

  • $1,050 in your wants envelopes.

  • $700 in your envelopes for savings and debt repayment.

When you pay for something, use money only from the corresponding envelope. For example, if you set aside $50 in an envelope marked “coffee” and you buy a $5 latte at Starbucks, you’ll take the money from the envelope. That leaves you with $45 left to spend on coffee for the month.

You can refill your envelopes once a month or after you get your paycheck.

The pros

Using the cash-based envelope system also helps avoid the overdraft fees and debt that can come with frequent debit and credit card swiping. Physically dividing up your money also makes you aware of exactly how much you have available to spend on a given item, which helps curb overspending on impulse purchases.

“What either makes or breaks a budget is the variable expenses. It’s the going out with friends here and there. It’s the $1.25 we’re giving to Redbox. It’s all these little things that add up,” says Carlos Moreno, a financial specialist and coordinator of the Mobility Mentoring Center at Economic Mobility Pathways, a Boston nonprofit that serves low-income families.. “That’s where the envelope system is so effective. It shows you right then and there how much money is going into specific categories.”

Cash-only users can’t spend more than they’ve allotted and are more likely to feel an emotional connection to their money.

Cash-only users are more likely to feel an emotional connection to their money, too. Because cash is visible, touchable and instantly parts with you, it’s easier to be aware of how much you’re spending — and you’re likely to spend less than you would with a credit card, according to several studies.

The cons

Making regular trips to the bank or ATM to withdraw money can be time-consuming and leave you vulnerable. Carrying large sums of cash puts you at risk of loss or theft. You’ll also miss out on the protection and rewards that credit cards can offer.

Protect your savings allotment by putting it into a savings account, preferably one that pays a good interest rate, rather than keeping it in an envelope where it could be easily lost or stolen.

Who benefits from the envelope system

The envelope system can help new budgeters and impulsive spenders. It lets you set goals and gauge how much you spend and save. We recommend this method to people who want to take charge of their finances in a hands-on way.

Need help starting your budget?

NerdWallet breaks down your spending and shows you ways to save.

We want to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and safe by following our posting guidelines, and avoid disclosing personal or sensitive information such as bank account or phone numbers. Any comments posted under NerdWallet’s official account are not reviewed or endorsed by representatives of financial institutions affiliated with the reviewed products, unless explicitly stated otherwise.