If you struggle with overspending or simply want to be more mindful with your monthly expenses, the envelope method can help. The envelope method is a cash-based budgeting system that prevents overspending by dividing money into envelopes for certain spending categories.
How It Works
The first step to implementing the envelope budgeting method is deciding on your spending categories. These categories represent places in your budget that could benefit from spending limits. Groceries, dining out and shopping are popular categories for the envelope method because they are common areas where you may be tempted to go over budget.
Each category envelope is filled with cash at the beginning of the month. When the cash is gone, you can’t spend anymore.
- Decide on your spending categories
- Divide cash up and place in labeled envelopes
- Use your cash envelopes for monthly spending
- Monitor the amounts in your envelopes throughout the month
Why It Works
The envelope method works for a few reasons. First, it places a concrete limit on how much you can spend. Unlike a debit card, once the cash is gone it’s gone and you can’t stretch your budget to splurge on extras.
The envelope budgeting encourages you to physically handle your money every time you spend it. Once it’s gone, it’s gone!
Also, the method reinforces the concept that money is a finite resource. Physically handling your money every time you spend it, forces you to think about how much you have and how you are spending it.
Who Is It Right For?
The envelope method is a versatile approach that works for most people who already have a budget in place but need help sticking to spending limits. If you don’t already have a budget you may want to start with our budgeting spreadsheet first before trying the envelope method.
May be good for people who:
- Regularly use cash
- Have balanced a budget in the past
- Need to control spending in a few areas
- Lose track of their spending
- Overspend when using a debit card
May not be good for people who:
- Are prone to losing cash
- Have never made a budget before
- Do not know how to set spending limits for their budget
Spending Categories for The Envelope Budgeting Method
Using the envelope method alongside another budgeting technique can help you set proper spending limits for your envelope categories like:
- Dining out and more…
The envelope method usually works best when paired with another budgeting method. Try out one of these techniques to help you set spending limits for your envelopes.
Can I Use The Envelope Method Without Cash?
If carrying around cash isn’t your speed, you can still try the envelope method with a digital version.
One easy way to use digital cash envelopes without paying for a third-party app is to create sub accounts at your bank. Most online banks allow you to create subcategories within your main account. At the beginning of the month you’ll need to transfer the funds into your sub accounts based on the categories you set up in step two of the digital envelope system and remember to switch accounts while paying for things each month.
Apps like Mvelopes will simulate the system with a few clicks but require you to pay a monthly fee. Instead of paper envelopes and cash you link your bank account to the app and allocate a certain amount to digital envelopes.
Try it out!
Learn more about the pros and cons of the envelope budget before you start your own.