Are you struggling to stick to your budget and tend to overspend despite the budgeting apps on your phone? Do you just need a simple system to save up for a vacation or pay off that debt? Then the envelope system might be exactly what you need. All you need is a bunch of envelopes and a pen and you’re good to go.

Envelope System – Explained

In the Envelope system, you evaluate your budget for expenses you are most likely to overspend on, such as groceries, clothing, and entertainment etc. Then you allot an envelope for each expense and an amount of cash as per the budget. Now, whenever you leave your house, you grab the money from that envelope and spend ONLY within your budget.  You can check exactly the amount left in your envelope whenever you want and write on the back of the envelope to keep track of it. This way you can adjust your spending easily for the rest of the month/week. How simple is that!

How to make it a success

Now, every household has different nature of expenses, depending on the family size, salary system etc. It is wise to base it on your salary period, for example, if you receive your salary every two weeks, create the budget on a two-week period. Then, create a budget for each category like groceries, gas, personal, entertainment, other, etc, whatever suits you best. The aim is to control the most volatile expenses, and not just staying within the budget, but even saving from it, if possible.

Now let’s focus on groceries, the main busting budget category. According to Lifestyle blogger Jordan Page, setting a monthly grocery budget of $100 per family member is the most realistic amount. So, a family of four will have a budget of $400 per month, which means you can spend only $100 per week on groceries. Now, this may seem too less for some but here’s where you really need to reevaluate your priorities. Things that can help you are planning your meals ahead, shopping from affordable stores, making use of discounts and visiting grocery store only once per week etc. These practices can definitely help you stay (and maybe even save) within your $100 budget per week.
You can also make an envelope for emergency funds in case any unforeseen situation arises. Instead of withdrawing a huge amount at once for it, you can deduct 10% of your income for it, as practiced by Shannon Stone, who came out of bankruptcy and $50,000 debt through the envelope budgeting system.If your primary goal is to pay off a debt, then assign an envelope for it and fill it up with the set percentage from your every month’s salary. If you even end up saving from the other envelopes, add that cash in this category to get rid of the debt faster.

Ground Rules

You must have a lot of questions like, what if I overspend and run out of money or isn’t it easier to use cards instead of carrying all that cash? The envelope system requires a lot of self-discipline and self-awareness. If you comply with these rules, the reward will surely motivate you to follow it further.

  • Use cash only – We know it’s easier said than done, but the whole point of this system is to spend using cash because let’s face it, plastic money is the root cause of impulsive buying. There are countless studies to prove that credit or debit cards disconnect us from our purchases and shifts our focus on product benefits instead of its costs. Thus, we should physically hold the money and pay which is only possible through tangible cash. This will also avoid the credit fees, overdraft and other penalties that come with the card usage. However, if you have fixed expenses that automatically deduct through online banking, there’s no problem in using that.
  • Don’t credit from the next month/week cash – In case you overspend at groceries (which may happen often if your budget is underestimated), you will likely borrow the extra spent amount from the next week’s budget, which is a big no-no. This habit will end up in a spiral of overdue every week and disturb your entire budget. Instead, take the extra cash from the ‘Other’ category which you do not spend often and make sure to note that down.
  • Try not to shuffle the money in the envelopes – Its best if you stick to your budgeted envelopes to avoid any mess because it could effect the rest of your categories. However, in case of emergency situations, its okay to borrow from an envelope that’s easy to budget later on. But keep in mind that it doesn’t become a habit as self-control is the key to the success of this system. Thus, its best to have an envelope for emergency fund for unexpected cases.

Some tips on the envelope system

  • Manage your cash wisely – You don’t have to carry all the cash around everywhere, just take some out of the envelopes before you leave, which means you have plan your trip in advance to know if you are going for groceries or movies. At home, hide the envelopes in different places for safety. Or you can use the clip system like Rachel Cruze who keeps her cash clipped in her multipurpose wallet.
  • Use Partition folder – If keeping various envelopes is a hassle for
    you, just buy an accordion folder or a zipper pouch. It is easier to carry and provides betters durability.
  • Treat Yourself – If you end up saving from your envelope budget by the end of the month, congratulations! You have done a great job on saving and deserve to reward yourself by getting that mani-pedi or dinner out with family. Or if you’re really want to save in the long run, tuck it in your vacation plan or future investments.
  • Teach your kids too – Envelope budgeting is just as simple for kids as it is adults. Teaching them to be aware of their pocket money is essential to wise them up financially. You can buy them a zipper pouch and sort a section for long-term saving like college fees, another for short-term saving like toys and treats, and one for charity purposes.

Also, if you still refuse to carry the cash around, there are apps like You Need a Budget* or Mvelopes* based on the envelope system which offers services on your bank accounts to help you in budgeting.  

Envelope budgeting system may seem obsolete in this digital era, but as long as it works and keeps you away from overspending, you have mastered the complex task of budgeting. At the end of the day, this bargain comes with a huge reward in both the short and long-run.

So what are your views on the envelope system? Would you like to add some tips that we missed? Let us know in the comment section below.


Asma Yaseen

Apprentice Business Architect

Asma is a Business student, aspiring marketer/writer and a baking enthusiast. She joined our team in January of 2018.

*Money Munchkids is not affiliated with nor explicitly endorses the mentioned companies. The companies mentioned are examples for educational / information purposes.