The envelope budgeting method is a simple, systematic way of saving money and paying bills. The method helps you set aside what you need for bills while maintaining a personal budget. It is a popular budgeting system and can be implemented with personal finance software as well.
How Envelope Budgeting Works
The envelope budgeting system divides your income into different spending categories—bills, groceries, gas, and so on. Once you've decided how much you should spend on each category, you'll take that amount in cash and place it into an envelope. Then, only spend what's available in that envelope for that category's bills or purchases. The aim is to prevent you from overspending by limiting what is available to spend.
Even if you no longer use cash to pay bills, the principle still works and can be applied using software or other financial technology.
The strength of envelope budgeting is that it forces you to stay in touch with spending habits because once the envelope is empty, you can't spend from that category until the next paycheck replenishes the envelope.
Step 1: Establish Categories and Limits
To use envelope budgeting, first establish spending categories for your budget, and then set spending limits for the categories.
Note
The total amount for the spending categories must not exceed your monthly income.
To understand what categories might be useful for your budget, consider where your money goes. Try to list your common expenditures so you can group them effectively. For example, your categories may include:
Tailor your categories to your specific situation. Make as many categories as you need, but not so many as to be overwhelming.
Don't forget to include irregular expenses, such as taxes, insurance, or gifts, and a savings category.
To discover what a reasonable monthly limit might be for each category, check your recent banking statements or receipts to get an idea of your usual costs. You can use that number or, if you're trying to cut back, use a slightly smaller figure.
Step 2: Label Each Envelope
Using one envelope per spending category, write the name of each category and the monthly budgeted amount on the envelopes.
If you are paid weekly or bimonthly, divide the total monthly amount for each category by the number of pay periods you have in each month, and record that figure on the envelope. That will help you put the right amount from each paycheck into the envelope.
Step 3: Separate Funds
For this example, suppose you receive a paycheck for $500. Cash your paycheck, and put the allocated amount for each budgeted category into the respective envelope. A simple example might be divided like so:
- $100 in the grocery budget envelope
- $200 in the rent budget envelope
- $70 in the gas and auto maintenance budget envelope
- $30 in the utility budget envelope
- $70 in the personal care and clothing envelope
- $30 in the savings budget envelope
Each time you are paid, add that check's earnings to each cash envelope according to your established budget.
Step 4: Spend from the Envelopes
When you go shopping or pay a bill, take the money for the payment from the appropriate envelope. If you are paying a bill in person, carry the envelope with you. Likewise, if you are going grocery shopping, bring your grocery envelope along with you.
Note
If you spend all of the money in one of your envelopes, do not pull cash from another envelope in order to continue spending. If you do, you'll be short for that category.
At the end of the month, if you have money left over in any of your envelopes, you can either keep it in that envelope for the next month's spending or remove it and add it to savings or your emergency fund. Budgeting that way can help you reach a savings goal, which in turn can help you keep your budget on track.
Envelope Budgeting With Financial Software
With direct deposit for paychecks, electronic funds transfer, debit cards, credit cards, and checks, cash envelope budgeting may seem obsolete. However, with personal finance or budgeting software that is built around envelope budgeting principles, you can use convenient financial transaction methods while still maintaining the discipline of envelope budgeting.
Envelope budgeting apps such as You Need a Budget uses virtual "envelopes" to represent budget categories and to show spending activity and balances for each category. When income is recorded, the software distributes a portion to each "envelope." When a purchase is made, you tell the software which spending categories to use, and the software deducts the money from the "envelopes."
Bills that are paid directly cause the software to remove the payment amount from the appropriate envelope. If you use a credit card as a payment method, the software can set aside that amount in a credit card payment "envelope" or category to be used when you pay the credit card bill.
Frequently Asked Questions (FAQs)
How does the envelope system help with budgeting?
The traditional cash envelope budgeting system makes it easy to stick with a budget, because you can't spend anymore once a specific envelope is empty for the month. If you stick to it, that puts a hard limit on each spending category.
Are there downsides to a cash envelope budget?
The biggest downside of the cash envelope system is that it's out of sync with today's world. People use cash less and less, and carrying cash envelopes can be inconvenient or even unsafe. If you want the benefits and structure of an envelope system but don't want to carry cash, consider using an app such as YNAB or Mvelopes that allows you to imitate the system digitally.
Insights, advice, suggestions, feedback and comments from experts
As an expert in personal finance and budgeting, I can provide you with information about the envelope budgeting method mentioned in this article. The envelope budgeting method is a systematic way of saving money and paying bills while maintaining a personal budget. It is a popular budgeting system that can be implemented with personal finance software as well.
How Envelope Budgeting Works
The envelope budgeting system involves dividing your income into different spending categories, such as bills, groceries, gas, and more. Once you have determined how much you should spend on each category, you will take that amount in cash and place it into an envelope dedicated to that category. You will then only spend what is available in that envelope for the respective category's bills or purchases. The aim is to prevent overspending by limiting what is available to spend.
Even if you no longer use cash to pay bills, the principle of envelope budgeting can still be applied using software or other financial technology. There are envelope budgeting apps available, such as You Need a Budget (YNAB), that use virtual "envelopes" to represent budget categories and track spending activity and balances for each category [[11]].
Step 1: Establish Categories and Limits
To use the envelope budgeting method, you first need to establish spending categories for your budget and set spending limits for each category. It is important to ensure that the total amount allocated to the spending categories does not exceed your monthly income. You can determine the categories by considering where your money typically goes and grouping common expenditures effectively. Examples of categories include groceries, gas, health and grooming, clothing, dining out, household items, pet care, children's items, and more. Tailor the categories to your specific situation, making as many as you need without overwhelming yourself. Don't forget to include irregular expenses, such as taxes, insurance, or gifts, and a savings category. To determine a reasonable monthly limit for each category, you can refer to your recent banking statements or receipts to get an idea of your usual costs [[11]].
Step 2: Label Each Envelope
Using one envelope per spending category, write the name of each category and the monthly budgeted amount on the envelopes. If you are paid weekly or bi-monthly, divide the total monthly amount for each category by the number of pay periods you have in each month and record that figure on the envelope. This will help you allocate the right amount from each paycheck into the respective envelope [[11]].
Step 3: Separate Funds
When you receive your paycheck, cash it and put the allocated amount for each budgeted category into the respective envelope. For example, if you receive a paycheck for $500, you might allocate $100 to the grocery budget envelope, $200 to the rent budget envelope, $70 to the gas and auto maintenance budget envelope, $30 to the utility budget envelope, $70 to the personal care and clothing envelope, and $30 to the savings budget envelope. Each time you are paid, add that check's earnings to each cash envelope according to your established budget [[11]].
Step 4: Spend from the Envelopes
When you need to make a purchase or pay a bill, take the money for the payment from the appropriate envelope. If you are paying a bill in person, carry the envelope with you. If you are going grocery shopping, bring your grocery envelope along with you. It is important to note that if you spend all the money in one envelope, you should not pull cash from another envelope to continue spending. The aim is to stick to the budget and not exceed the allocated amount for each category. At the end of the month, if you have money left over in any of your envelopes, you can either keep it in that envelope for the next month's spending or remove it and add it to savings or your emergency fund. This method can help you reach your savings goals and keep your budget on track [[11]].
Envelope Budgeting With Financial Software
While cash envelope budgeting may seem obsolete with the prevalence of direct deposit, electronic funds transfer, debit cards, credit cards, and checks, you can still apply the principles of envelope budgeting using personal finance or budgeting software. These software programs are built around envelope budgeting principles and allow you to use convenient financial transaction methods while still maintaining the discipline of envelope budgeting. For example, You Need a Budget (YNAB) is an envelope budgeting app that uses virtual "envelopes" to represent budget categories and tracks spending activity and balances for each category. When income is recorded, the software distributes a portion to each "envelope," and when a purchase is made, you can assign the spending category, and the software deducts the money from the corresponding "envelope." The software can also handle bill payments and credit card payments by allocating the appropriate amounts from the respective envelopes [[11]].
Frequently Asked Questions (FAQs)
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How does the envelope system help with budgeting? The envelope system makes it easy to stick to a budget because once a specific envelope is empty for the month, you can't spend any more in that category. It puts a hard limit on each spending category, helping you stay within your budget [[11]].
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Are there downsides to a cash envelope budget? The biggest downside of the cash envelope system is that it may be out of sync with today's world where cash is used less frequently. Carrying cash envelopes can be inconvenient or even unsafe. However, there are digital alternatives, such as budgeting apps like YNAB or Mvelopes, that allow you to imitate the envelope system digitally [[11]].
I hope this information helps you understand the envelope budgeting method and how it can be implemented using cash or personal finance software. Let me know if you have any further questions!
