Envelope Budgeting System – How It Works, Pros & Cons (2024)

So you’ve been working to make a budget using tools like Personal Capital orMint.com and have been diligently putting in all of your income and expenses. Yet every month, it’s the same result: you continue to overspend.

While your efforts to create and maintain a budget are commendable, there is probably nothing that is actually holding you accountable to that budget. There is no reward if you succeed, nor repercussionsif you don’t.

So how can you make your budget actually work for you, and how can you hold yourself accountable to it? Try the envelope budgeting system.

Envelope Budgeting System – How It Works

The envelope budgeting system is very tangible. You use cold hard cash to control your spending and when you run out, you stop spending. Here is the process for how it works:

1. Determine Your Discretionary Income
Before you start the envelope system, determine how much you have available after you pay your bills and put money aside for savings and investments.

2. Decide on a Budget
Once you know how much money you have left, decide how to divide it among the differentbudget categories in which your monthly spending varies. Some examples of common categories include: groceries, household items, entertainment or dining out, clothing, gifts, gas, and allowance (to be spent as fun money).

Tip: Look back at your bank statements to get an idea of how much you have been spending in these areas.

3. Create Envelopes and Stuff Them with Cash
Get an envelope for each category and write the categoryname on the front. Then, after each paycheck, put in the budgeted amount of cash.

4. Spend Cash Only
Once you run out of cash in an envelope, you have met your budget for that pay period and are unable to spend any more in that category until the next pay period.

5. Pay Off Debt with Extra Money or Save It
If you have any debt, use the money left over from your envelopes to pay it off. If you do not have any debt, put your extra cash into a high yield savings account.


  1. It Works! The best part about the envelope budgeting system is that it simply works. If you are only paying for things using cash, and you run out of cash, you cannot possibly overspend. The envelope system has been around for a long time for good reason.
  2. It Will Help Discipline You. We all need discipline in our lives to make us better people, whether it is with our spending habits, our eating habits, or our productivity at work. The more you practice being disciplined, the easier it is to take responsibility for other life areas you want to improve.
  3. It Can Be Used as an Emergency Fund. Instead of carrying cash, many people carry plastic, which can be a problem if an emergency arises. Though the money in the envelope system is not intended for emergencies, you can always use it for one – like if your car breaks down in the middle of nowhere and you need to pay for a tow or a ride back home.
  4. Your Budget Becomes Tangible. The concept of money is much more tangible if you use cash instead of plastic. Credit cards can easily cause you to overspend. When using envelope cash, you will be more in tune with your budget because you’ll be reminded of it every time you reach for an envelope to spend from.
  5. No Overdraft Charges. Have you ever been charged an overdraft fee from your bank? If you put away your debit card and use cash instead, you are much less likely to overdraft and get chargedthe absurd fee.
  6. Less Wasteful Spending. When I used an Excel spreadsheet to create my budget, I would look back at the end of the month and be surprised to see what I wasted my money on. However, when you use the envelope budgeting system, you are more likely to think through every purchase. You’re less likely to spend wastefully when you see the money disappearing before your very eyes. In fact, people spend 10% to 15% less when using cash.
  7. You Won’t Miss a Payment. When using the envelope budgeting system, you pay upfront and there is nothing you need to keep track of. On the other hand, if you use an electronicprogram to do your budget, it is easy to miss entering in purchases. I believe the budget I kept electronically was off by hundreds of dollarseach month due to the fact that I lost receipts on a regular basis.


  1. It’s Tough to Get the Whole Family on Board. Some people are adamantly against using cash. They like the simplicity and ease of using plastic, and who can blame them? However, for the envelope budgeting system to be successful, the whole family needs to be fully committed to making it work. Otherwise, it won’t.
  2. You Must Go to the Bank or ATM to Withdraw Cash. I really try to avoid going to the bank or the ATM. It is just another errand I have to run in my already busy life as a stay at home mom. But if you use the envelope budgeting system, you’ll obviously have to get cash from somewhere to stuff your envelopes.
  3. Getting Started Can Be Confusing. I know that the process I described sounds pretty straight forward, but you will eventually come across situations that can be confusing. For example, if you make a purchase at Target and buy $20 worth of groceries, $20 worth of clothing, and $20 worth of house decor, where do you get the cash from? You will probably need to get it from three different envelopes. You’ll experience a learning curve as you figure out how to stick to your categories.
  4. You Won’t Get Credit Card Rewards. Before I used the envelope budgeting system, I would rack in enough points to earn $250 a year with the best cash back credit cards. But with the envelope budgeting system, you forego credit card rewards because you won’t be using your credit card as much or even at all.

More Tips for the Envelope Budgeting System

1. Pick Categories You Have the Most Trouble With
My husband and I used to have an envelope for clothing. But after about six months of never using any cash from that envelope, we decided it was wasteful to budget money to that category. Instead, we put more money towards household goods, and if we ever decide to buy new clothes, it can come out of that category. There is no need for an envelope category that you do not overspend in.

2. Use a Small Accordion Folder Instead of Envelopes
A good friend of mine made this suggestion. She recommends accordion folders because instead of having seven different envelopes to keep track of, she only has one. Her accordion folder is envelope size, so it is perfect for keeping cash. It is also more durable than paper envelopes.

3. Only Take the Cash You Need
If you have budgeted $100 for eating out this month and go to a work lunch, don’t bring all $100. Instead, just take what you need from the envelope at home and put it in your wallet for the day. This is especially helpful when you have multiple people using the same main envelopes.

4. Budget by Paycheck
There are several different ways you can set up your budget: by week, by month, by quarter, and by paycheck. I recommend doing it by paycheck because you can accurately plan your budget according to the timing of your paycheck and bills.

5. Adjust Your System as Necessary
It may take a while to get everything set up correctly. You may go through a dozen pay periods before you get your budgeting amounts and categories just right. Definitely make adjustments. Nothing is setin stone until you decide you are comfortable with the program.

6. Reduce Your Bills
By reducing your bills, you significantly increase your discretionary income. Consider strategies like finding a cheaper cell phone planlike one from Ting or getting rid of cable TV. Reducing your bills provides more cash for your envelopes. If you need help lower some of your expenses look into Billshark.

7. Decide the Rules Beforehand
One issue my husband and I debated was whether or not to borrow from other categories if we ran out of cash in one of them. This is up to each person or family who uses the system. However, I recommend determining the ground rules before starting to avoid possible confusion. Through trial and error, we eventually decided to combine categories that we commonly borrowed from. Remember, it’s fine to adjust as necessary.

8. Use Extra Money to Pay Down Debt
If you do have extra money at the end of your budgeting cycle, use it to pay off debt. If you are debt free, I recommend either investing that money or saving it. I save extra money for the purchase of a van since it is an upcoming expense that we want to pay cash for.

9. Stick with It
It takes time to get disciplined, and it will take time to get the correct amounts budgeted for your envelopes. Have somepatience because if you do, the envelope budgeting system will not fail you.

Final Word

In the electronic era in which we live, it might seem archaic to carry around paper envelopes of cash. However, don’t think of it as being behind the times. What’s most important is that it works. As long as you stick to the rules and put away the plastic, it will work. After all, if you are out of cash and don’t use plastic, you can’t overspend.

If you do want to utilize more technology, check out Mvelopes, an award-winning online spending management tool that’s based on the traditional envelope method of budgeting.

Have you ever used the envelope budgeting system? How did it work for you?

Envelope Budgeting System – How It Works, Pros & Cons (2024)


Envelope Budgeting System – How It Works, Pros & Cons? ›

Pros and Cons of the Envelope System

How does the envelope system work? ›

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.

What are two reasons that a cash envelope system can be an effective way to budget for your wants? ›

You could see exactly what you spend

The cash envelope system is visual, making it simple to see just how much you're spending on various categories throughout each month. It could also help you understand what changes you might want to make to meet your saving goals.

What are the cons of cash stuffing? ›

Cash stuffing, like other budgeting methods, is a way to plan out your spending and keep track of expenses. While it can be helpful for curbing overspending and limiting credit card debt, the downside of budgeting with cash is that you're missing out on the protection and yields offered by bank accounts.

How does envelope savings work? ›

It works like this: Gather 100 envelopes and number them from 1 to 100. Each day, fill up one envelope with the amount of cash corresponding to the number on the envelope. You can fill up the envelopes in order or pick them at random. After you've filled up all the envelopes, you'll have a total savings of $5,050.

What is envelope budgeting pros and cons? ›

When you're out of cash in the envelope, that's it. You can't overspend. Plus, you avoid the overdraft and fee penalties associated with careless card swiping. Cons: Carrying cash is not a practical system for some consumers.

What is the downside of the envelope system? ›

Requires physical money – Because this system is all cash, you'll be less reliant (if at all) on credit cards. This could be inconvenient and may even cause you to lose out on some of the benefits of using credit cards, like a more active credit history and rewards points.

What are the disadvantages of envelope budgeting? ›

You may also feel unsafe carrying cash, as it's harder to track it when it's lost or stolen. It can be cumbersome to get started: Getting all the envelopes ready and allocating money into categories can take some time to set it all up, especially if you haven't created a budget before.

What are the downsides of envelope budgeting? ›

It's A Pain Going to the Bank

Cash envelope budgeting only works when you have physical cash in hand, which means you'll be going to a physical bank more. As a result, this errand takes time out of your day, especially if you want an exact amount with smaller bills.

What are the advantages of envelope budgeting? ›

  • It Works! The best part about the envelope budgeting system is that it simply works. ...
  • It Will Help Discipline You. ...
  • It Can Be Used as an Emergency Fund. ...
  • Your Budget Becomes Tangible. ...
  • No Overdraft Charges. ...
  • Less Wasteful Spending. ...
  • You Won't Miss a Payment.

What is one potential downside of using a cash envelope budget? ›

One potential downside of using a cash envelope budget is the inconvenience of having to physically carry and manage cash. This can be especially cumbersome for those who prefer to use credit or debit cards for their purchases. Additionally, carrying a significant amount of cash can be a security risk.

What is the 50 30 20 rule? ›

The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).

What are the disadvantages and advantages of cash? ›

The pros and cons of cash
  • No interest charges. There are no additional charges when you pay with cash. ...
  • Makes it easier to follow a budget. ...
  • Less Secure. ...
  • Less Convenient. ...
  • Your cash savings may not cover certain expenses. ...
  • Pros:
  • Rewards credit card benefits. ...
  • A credit card payment can help cover surprise costs.
Nov 14, 2023

Is envelope budgeting a good method? ›

Pros of using cash envelopes to budget

If you stick to the plan, it can be harder to overspend with this method since you're only allowed to use the cash on hand. Having a visual of your funds and how much you planned to spend in each category can help you stick to your budget.

What is the envelope budget trick? ›

Instead of having money set aside for each category in your head, or even scribbled on a paper somewhere, take one envelope for each expense category and mark it clearly. Now, put the exact amount of cash for this month in the envelope for each category. Do this with every expense category, and voila!

Does Dave Ramsey use the envelope system? ›

This is Dave Ramsey's proven, easy-to-use cash management system. Try this simple way to manage your household income and expenses and avoid spending more than you earn. The Essential Cash Envelope System has the same great functions of the traditional envelope systems you know and love but with a fresh look!

How much money do you save with the envelope system? ›

Step #5: Repeat until each envelope is full.

Some days you may have less cash on you and you could be tempted to pull a different envelope. Stick to the rules as closely as you can. If you can tough it out, you'll save more than $5,000 in just over three months.

Can you do the envelope system without cash? ›

The beauty of the cashless envelope system in a digital format is its ability to integrate seamlessly into our daily lives. By leveraging budgeting apps, we can automate the process, ensuring that our spending aligns with our budget without the need for physical cash or manual tracking.

How do I get started with the envelope system? ›

So, let's recap the steps you need to take to start using the cash envelope system:
  1. STEP #1: Create a budget.
  2. STEP #2: Track your expenses.
  3. STEP #3: Categorize your spending.
  4. STEP #4: Set limits for each category.
  5. STEP #5: Decide when to pull out cash.
  6. STEP #6: Pay your regular bills online.
Jul 23, 2018

Top Articles
Latest Posts
Article information

Author: Edwin Metz

Last Updated:

Views: 5965

Rating: 4.8 / 5 (58 voted)

Reviews: 81% of readers found this page helpful

Author information

Name: Edwin Metz

Birthday: 1997-04-16

Address: 51593 Leanne Light, Kuphalmouth, DE 50012-5183

Phone: +639107620957

Job: Corporate Banking Technician

Hobby: Reading, scrapbook, role-playing games, Fishing, Fishing, Scuba diving, Beekeeping

Introduction: My name is Edwin Metz, I am a fair, energetic, helpful, brave, outstanding, nice, helpful person who loves writing and wants to share my knowledge and understanding with you.