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With the envelope system, you allocate your take-home pay toward specific categories by placing cash in labeled envelopes.
You can apply a digital approach to the envelope system with the help of apps and spreadsheets.
This system allows you to closely track all of your money; a downside is that it takes a significant amount of effort.
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.
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.
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.