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There are few among us who have never struggled with finances or mismanaged our money in some way. Failing to spend within our means is an all too common problem, but know that you’re not alone if you’ve found yourself in debt or unable to save money.

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Thankfully, there are several types of personal budgets that you can use to get yourself back on track and on your way to financial freedom. By taking control of your budget you’ll be able to curb overspending, set aside money for retirement, and get out of debt. One popular way to do this is with the envelope system.

What Is the Envelope Budget System?

The envelope system, also called “cash stuffing,” is a method of budgeting that can help you get an accurate picture of your spending and help you budget responsibly. Essentially, you’ll convert all your take-home pay at the beginning of each month over to cash and then separate this into different spending categories.

Each category will have its own envelope with a set amount of money in it and that’s all you’re allowed to spend for the month. After you run out, there’s no more money that can be used for that specific category. 

Cash Stuffing: How To Implement the Envelope Budget System

a woman uses the envelope budgeting system

Here are the basic steps to set up an envelope budget system. This method helps you manage your spending by using physical envelopes for different expense categories.

  1. Determine your budget
  2. Choose your categories
  3. Assign dollar amounts and create envelopes
  4. Spend from your envelopes for the month

1. Determine your budget

To begin, you’ll need a clear idea of how much money you’re bringing in each month and account for where every dollar goes. Think of it as giving each dollar a specific “job” so there’s nothing left over when you’re done. This is an important step to get right because you can’t properly budget until you know exactly what numbers you’re working with.

Use your after-tax income, which can include your regular paycheck, investment income, part-time work or “side hustles,” government benefits, child support or alimony, and any other regular sources of income.

💵 Subtract your fixed costs from your total income to determine how much money you can distribute among your spending envelopes.

Separate your fixed expenses from your variable expenses. Your fixed expenses stay the same from month to month, like your rent or mortgage, student loan payments, insurance, or utilities. Fixed expenses are typically not included in an envelope budgeting system. Add up your fixed expenses and subtract this amount from your total take-home pay and this is what you’ll be left with to put towards your variable expenses.

2. Choose your categories

This next step may look different for each person depending on your interests or how you like to spend your time, though there will be some categories that apply to everyone. Here, you’ll list out the different expense categories that you spend money on in any given month. There’s no rule about how many of these you should have, but you don’t want to go over 8 to 10 because it can make it difficult to manage.

Here are a few suggestions of categories you might use:

  • Groceries
  • Gas
  • Entertainment
  • Clothing
  • Automotive
  • Dining out
  • Entertainment
  • Gifts
  • Personal care
  • Savings
  • Investing

If you want to get more specific within a certain category you can. For example, you may want to split up your “entertainment” category into “movies” and “activities with the kids,” or if you have a particular interest you want to allot money to you can add categories like “makeup and accessories,” “gardening,” or “video games.” If you’re having trouble coming up with your categories it can be helpful to review your bank and credit card statements for the past few months to get a better idea of what you’re spending your money on.

📉 It’s okay to have a “miscellaneous” envelope for unexpected expenses – the goal is to assign a category to every dollar.

3. Assign dollar amounts and create your envelopes

Now you have to decide how much you’ll allot to each of these spending categories per month and it’s here that reviewing your past bank statements can really be helpful. Many people who’ve never truly budgeted before don’t have a clear idea about what they spend per month on things like groceries, gas, or going out to eat.

Once you’ve determined your categories and amounts, write this number on the outside of each envelope (“groceries, $500,” or “Dining out, $150”) and put the cash in each envelope. Note that you can split this up if you get paid every two weeks. For instance, you may put $250 in the grocery envelope at the beginning of the month, then an additional $250 two weeks later when you get paid again.

💡 Pro Tip: Take your best guess. It’s okay for these amounts to change each month when starting out.

When you start out you may just be taking your best guess at what your spending will be, so it’s perfectly fine if you need to adjust for the next month by upping your amount in one category and lowering it in another. This is all helping you have a better idea of where your money’s going.

4. Spend from your envelopes for the month

Now comes the fun part—spending your money! Most people like to keep all their envelopes at home in one place and only take what they need with them when they go out. For example, if you’re going to the supermarket, you’ll want to grab the “groceries” envelope and maybe the “gas” envelope if you need to fill up on the way.

👍 By limiting the temptation to overspend, the envelope system can be a powerful tool for paying down debt and increasing your savings.

Or, if you’re going to meet friends for lunch, you may only want to grab $20 out of your “dining out” envelope so you don’t overspend and are sure to leave yourself with enough for the rest of the month. But always remember the most important rule: after you’ve spent all the money in an envelope, that’s it; you can’t spend more until next month.

Envelope System Example

Now we’ll look at an example envelope budget so you can see how the money is distributed. Let’s say you earn $3,500 a month in take-home pay, and your fixed expenses are $2,100 (rent, utilities, car payment, insurance).

A typical envelope budget for the month may look like this:

  • Groceries: $615
  • Gas: $130
  • Entertainment: $150
  • Personal care: $75
  • Dining out: $180
  • Clothing and accessories: $130
  • Savings: $120

This means you’ll be left with $1,400 to put in your different categories.

Total Income$3,500
Fixed Expenses$2,100
– Rent & UtilitiesIncluded
– Car Payment & InsuranceIncluded
Remaining for Categories$1,400
Personal Care$75
Dining Out$180
Clothing and Accessories$130

Who Is the Envelope System Best For?

cartoon image of a man using the envelope budgeting system

Not everyone will love using the envelope system, but it can be a great solution for those who like to use visual and tactile tools to help accomplish their personal finance goals. By only using physical cash (and knowing that when it’s gone it’s gone), it can help you see where your money is going each month.

It can also be a wake-up call if you find yourself only halfway through the month and realize you’ve already spent your whole “dining out” envelope. The envelope system is also good for impulsive spenders who may rely too heavily on a credit card without really thinking through how much it will cost.

Advantages of the Envelope Budget System

There’s no one budgeting system that will make sense for everyone, but the envelope technique has many benefits:

  • It will discipline you to be a conscientious spender
  • It’s much harder to overspend than when you use a card
  • You won’t have to deal with overdraft fees or interest payments on credit cards
  • It gives you real-time feedback on your spending and lets you see exactly where your money is going
  • Using only cash can actually help you spend less since you’ll be more connected to your money rather than using a card

Disadvantages of the Envelope Budget System

Of course, a system like this will also have a few drawbacks:

  • It can be labor-intensive to convert your income into cash each month, which means more trips to the bank or ATM
  • Carrying so much cash can make some people feel like they’re at a higher risk of losing it or having it stolen
  • Cash is less convenient than credit cards and some businesses may only accept cards for payment
  • It takes time to set up your envelopes each month

How Does the Envelope Budgeting System Compare?

Type of Personal BudgetDescription
Traditional BudgetSubtracts monthly expenses from income, ideal for beginners.
50/30/20 BudgetDivides income into 50% for needs, 30% for wants, and 20% for savings/debt.
Zero-Based BudgetAllocates every dollar of income to specific categories until it equals zero.
Goal-Based BudgetFocuses on specific financial goals with some flexibility.
Spending Cap BudgetSets a maximum cap on monthly spending to encourage savings.
Envelope System BudgetUses physical cash in envelopes for different spending categories.
Pay Yourself First BudgetPrioritizes savings by setting aside money for savings first.
Sub-Savings Accounts BudgetCreates detailed savings goals within a primary savings account.
Anti-Budget BudgetA relaxed approach: save first, pay bills, and spend the rest freely.

Does the Envelope System Really Work?

When implemented correctly, the envelope system is a useful tool for budgeting and teaching you how to spend less money. Pick a method that best aligns with your needs and is one that you can actually follow. For some, the envelope system may feel like too much work and they don’t like the idea of having all their transactions be in cash. On the other hand, for those who have trouble limiting their spending and like the idea of having physical envelopes to help them keep track of everything, this system can be extremely effective.

Is it possible to digitalize the envelope system?

There are options to make the envelope system digital, but they will require you to use an app to keep track of your spending categories. Check out some of the best budgeting apps like Goodbudget, Everydollar, or YNAB which are all well-reviewed and let you allocate money to specific categories. 

What if I have an emergency?

Emergencies will happen, and you’ll have to shift around money to come up with the funds for this which means you’ll have less on hand for the next few months. It’s helpful to also keep an emergency savings fund in your bank account for these events.

What do I do with leftover cash?

Hurray! Having cash left over is an awesome thing and it’s really up to you what you do with it. We would recommend putting this extra money towards savings or debt, but it can also be used to supplement another category that you’ve run low on. Having money left over is also a good indication that you can allocate less to that category the next month.