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The Envelope System: Should You Use it to Budget?

The envelope system takes money, envelopes and a little bit of planning.
Sept. 6, 2019
Managing Money, Personal Finance
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The envelope system is a technique that can help budgeting novices and overspenders take control of their finances. All it takes is money, envelopes and a little bit of planning. Here’s what you need to know before you give it a try.

What is the envelope system?

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.

The envelope system is one of the most effective ways of budgeting, 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. It gives you a sense of where you thrive, he says, and what your drawbacks are in certain categories. The envelopes you burn through fastest likely signal areas where you can improve.

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How the envelope system works

Start by thinking about the types of expenses you have and labeling your envelopes. Then, consider how much money is appropriate to put in each one.

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 deduct that amount from the envelope. That leaves you with $45 left to spend on coffee for the month.

A good rule of thumb is to refill your envelopes once a month or after you get your paycheck.

» MORE: Budget worksheet

The pros

The envelope system can help eliminate surprises. Physically dividing up your money makes you aware of exactly how much you have to spend and save. This encourages you to keep your priorities straight and curb unnecessary spending.

“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,” Moreno says. “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.

With the cash-based envelope system, you’ll avoid the overdraft fees and debt associated with careless debit and credit card swiping. Cash-only users can’t spend more than they’ve allotted and are more likely to feel an emotional connection to their money. 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

Still, you should approach the old-fashioned envelope budgeting system with caution. 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.

Plus, you won’t earn interest on your savings by storing cash in an envelope as you would with a savings account or certificate of deposit.

» MORE: How to choose the right budget system

When to use 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.

If you’re worried about keeping sizable amounts of cash on your person or in your home, consider tracking your budget electronically instead. Look for apps like Mint and Mvelopes that securely connect to your bank accounts if you prefer digital over manual budgeting.