How to Budget Using The Envelope System - NerdWallet (2024)

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Key takeaways:

  • With the envelope system, you allocate your take-home pay toward specific categories by placing cash in labeled envelopes.

  • On TikTok, it's known as "cash stuffing."

  • You can apply a digital approach to the envelope system with the help of apps and spreadsheets.

  • This system allows you to closely track all of your money; a downside is that it takes a significant amount of effort.

What is ‘cash stuffing’?

The envelope system — also known on TikTok as "cash stuffing" — is a budgeting method that allows you to physically portion out your monthly income into different spending categories.

This money management system has been around for years, but cash stuffing or the envelope budgeting method has taken on new life from high-profile exposure on TikTok.

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. More recently, people have adopted digital methods, including spreadsheets and apps like Goodbudget and Mvelopes.

How the cash stuffing method works

Cash stuffing doesn’t have to be complicated, but it does require some organization and planning on your part. The three steps below outline how you can begin your budgeting journey, if this is the right method for you.

1. Start with a budget

A solid budget can make the cash stuffing method smoother by ensuring you have enough money to cover your expenses. Consider using the 50/30/20 budget, where you put 50% of your after-tax income toward needs like rent and groceries, roughly 30% toward wants like travel and eating out, and at least 20% toward savings and debt repayment.

Say you take home $3,500 a month. This is what your budget might look like:

  • $1,750 in your needs envelopes.

  • $1,050 in your wants envelopes.

  • $700 in your envelopes for savings and debt repayment.

Keep in mind that this is just one budgeting strategy and you can divvy up your money as you see fit.

2. Create your envelope categories

Think about the types of expenses you have and sort them into categories. You get to decide how broad or specific to be here. You can have a general “going out” envelope, for example, or you can have a “movies” envelope, a “restaurants” envelope and a “drinks” envelope.

Next, label an envelope for each category and fill it with the amount of cash you’ve allotted for that expense. That's the "cash stuffing" part of the process.

3. Limit spending to the envelopes

When you pay for something, use money only from the corresponding envelope. For example, if you set aside $50 in an envelope marked “coffee,” and you buy a $5 latte at Starbucks, you’ll take the money from the envelope. That leaves you with $45 left to spend on coffee for the month.

You can refill your envelopes once a month or after you get your paycheck.

How to Budget Using The Envelope System - NerdWallet (2)

The pros

The cash stuffing envelope system also helps avoid the overdraft fees and debt that can come with frequent debit and credit card swiping. Physically dividing up your money also makes you aware of exactly how much you have available to spend on a given item, which helps curb overspending on impulse purchases.

“What either makes or breaks a budget is the variable expenses. It’s the going out with friends here and there. ... It’s all these little things that add up,” says Carlos Moreno, a financial specialist and coordinator of the Mobility Mentoring Center at Economic Mobility Pathways, a Boston nonprofit that serves low-income families. “That’s where the envelope system is so effective. It shows you right then and there how much money is going into specific categories.”

Cash-only users are more likely to feel an emotional connection to their money, too. Because cash is visible, touchable and instantly parts with you, it’s easier to be aware of how much you’re spending — and you’re likely to spend less than you would with a credit card, according to several studies.

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How to Budget Using The Envelope System - NerdWallet (3)

The cons

Making regular trips to the bank or ATM to withdraw money can be time-consuming and leave you vulnerable. Carrying large sums of cash puts you at risk of loss or theft. You’ll also miss out on the protection and rewards that credit cards can offer.

Protect your savings allotment by putting it into a savings account, preferably one that pays a good interest rate, rather than keeping it in an envelope where it could be easily lost or stolen.

» MORE: How to choose the right budget system

Who benefits from the cash stuffing envelope system

The envelope system can help new budgeters and impulsive spenders. It lets you set goals and gauge how much you spend and save. We recommend this method to people who want to take charge of their finances in a hands-on way.

Want a free budget worksheet?

Use the Nerds’ 50/30/20 budget worksheet to see how your budget stacks up, and spot opportunities to save money.


How to Budget Using The Envelope System - NerdWallet (4)

How to Budget Using The Envelope System - NerdWallet (2024)


What is the Nerdwallet envelope method? ›

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 is the 50 30 20 rule of budgeting? ›

The 50-30-20 rule is a common way to allocate the spending categories in your personal or household budget. The rule targets 50% of your after-tax income toward necessities, 30% toward things you don't need—but make life a little nicer—and the final 20% toward paying down debt and/or adding to your savings.

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!

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

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.

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

What are the disadvantages of envelope budgeting? ›

  • It may be time-consuming. If you decide to use cash and envelopes instead of digital tools, you'll need to cash your paychecks and divide up the money every pay period. ...
  • Cash is vulnerable to theft and loss. ...
  • You miss out on credit card benefits.

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

The 100-envelope challenge is pretty straightforward: You take 100 envelopes, number each of them and then save the corresponding dollar amount in each envelope. For instance, you put $1 in “Envelope 1,” $2 in “Envelope 2,” and so on. By the end of 100 days, you'll have saved $5,050.

What is the easy envelope budget? ›

In this technique, the idea is to break down your monthly living expenses, savings, and debt repayments into categories and set aside the appropriate amount for each bucket — one envelope for the rent, another for the car payment, one for each credit card payment, one for savings goals, etc.

Is $1,000 a month enough to live on after bills? ›

Bottom Line. Living on $1,000 per month is a challenge. From the high costs of housing, transportation and food, plus trying to keep your bills to a minimum, it would be difficult for anyone living alone to make this work. But with some creativity, roommates and strategy, you might be able to pull it off.

How to budget $5,000 a month? ›

Consider an individual who takes home $5,000 a month. Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000.

Is the 50 30 20 budget realistic? ›

The 50/30/20 rule can be a good budgeting method for some, but it may not work for your unique monthly expenses. Depending on your income and where you live, earmarking 50% of your income for your needs may not be enough.

What is the downside of the envelope system? ›

Disadvantages of Using the Cash Envelope System

You have to get cash out of your bank account. You have to juggle cash. You have to spend only what you have.

Is the cash envelope system effective? ›

Benefits of cash stuffing

While other budgeting methods merely track your spending, cash stuffing physically prevents you from going over budget. Once an envelope is empty, you can't spend any further. That makes it useful if you're an impulse shopper or find yourself coming up short every month.

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 the envelope method work? ›

The cash envelope system is a way to track exactly how much money you have in each budget line for the month by keeping your cash tucked away in labeled envelopes. Throughout the month, you can just peek inside an envelope to see what's left to spend—because you'll see the literal amount in cash.

What is the envelope method? ›

The idea is to split up your money according to how much you want to spend in each category—and then only let yourself spend until the cash in each envelope is gone. Envelope budgeting works best for variable expenses, like groceries and dining out, which change slightly every month depending on your spending habits.

What is the envelope technique? ›

The envelope system is based on the whole psychology of people spending less when using cash instead of plastic. You are far more restrained in your spending when you pull money (not plastic) out of your wallet. That's one of the biggest benefits to stuffing cash into envelopes for budgeting purposes.

What is the envelope method example? ›

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.

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