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

FAQs

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.

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.

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!

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.