How to Use Envelope Budgeting to Manage Your Finances (2024)

The envelope budgeting method is a simple, systematic way of saving money and paying bills. The method helps you set aside what you need for bills while maintaining a personal budget. It is a popular budgeting system and can be implemented with personal finance software as well.

How Envelope Budgeting Works

The envelope budgeting system divides your income into different spending categories—bills, groceries, gas, and so on. Once you've decided how much you should spend on each category, you'll take that amount in cash and place it into an envelope. Then, only spend what's available in that envelope for that category's bills or purchases. The aim is to prevent you from overspending by limiting what is available to spend.

Even if you no longer use cash to pay bills, the principle still works and can be applied using software or other financial technology.

The strength of envelope budgeting is that it forces you to stay in touch with spending habits because once the envelope is empty, you can't spend from that category until the next paycheck replenishes the envelope.

Step 1: Establish Categories and Limits

To use envelope budgeting, first establish spending categories for your budget, and then set spending limits for the categories.

To understand what categories might be useful for your budget, consider where your money goes. Try to list your common expenditures so you can group them effectively. For example, your categories may include:

  • Groceries
  • Gas
  • Health and grooming
  • Clothing
  • Dining out
  • Household items
  • Pet care
  • Children's items

Tailor your categories to your specific situation. Make as many categories as you need, but not so many as to be overwhelming.

Don't forget to include irregular expenses, such as taxes, insurance, or gifts, and a savings category.

To discover what a reasonable monthly limit might be for each category, check your recent banking statements or receipts to get an idea of your usual costs. You can use that number or, if you're trying to cut back, use a slightly smaller figure.

Step 2: Label Each Envelope

Using one envelope per spending category, write the name of each category and the monthly budgeted amount on the envelopes.

If you are paid weekly or bimonthly, divide the total monthly amount for each category by the number of pay periods you have in each month, and record that figure on the envelope. That will help you put the right amount from each paycheck into the envelope.

Step 3: Separate Funds

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
  • $200 in the rent budget envelope
  • $70 in the gas and auto maintenance budget envelope
  • $30 in the utility budget envelope
  • $70 in the personal care and clothing envelope
  • $30 in the savings budget envelope

Each time you are paid, add that check's earnings to each cash envelope according to your established budget.

Step 4: Spend from the Envelopes

When you go shopping or pay a bill, take the money for the payment from the appropriate envelope. If you are paying a bill in person, carry the envelope with you. Likewise, if you are going grocery shopping, bring your grocery envelope along with you.


If you spend all of the money in one of your envelopes, do not pull cash from another envelope in order to continue spending. If you do, you'll be short for that category.

At the end of the month, if you have money left over in any of your envelopes, you can either keep it in that envelope for the next month's spending or remove it and add it to savings or your emergency fund. Budgeting that way can help you reach a savings goal, which in turn can help you keep your budget on track.

Envelope Budgeting With Financial Software

With direct deposit for paychecks, electronic funds transfer, debit cards, credit cards, and checks, cash envelope budgeting may seem obsolete. However, with personal finance or budgeting software that is built around envelope budgeting principles, you can use convenient financial transaction methods while still maintaining the discipline of envelope budgeting.

Envelope budgeting apps such as You Need a Budget uses virtual "envelopes" to represent budget categories and to show spending activity and balances for each category. When income is recorded, the software distributes a portion to each "envelope." When a purchase is made, you tell the software which spending categories to use, and the software deducts the money from the "envelopes."

Bills that are paid directly cause the software to remove the payment amount from the appropriate envelope. If you use a credit card as a payment method, the software can set aside that amount in a credit card payment "envelope" or category to be used when you pay the credit card bill.

Frequently Asked Questions (FAQs)

How does the envelope system help with budgeting?

The traditional cash envelope budgeting system makes it easy to stick with a budget, because you can't spend anymore once a specific envelope is empty for the month. If you stick to it, that puts a hard limit on each spending category.

Are there downsides to a cash envelope budget?

The biggest downside of the cash envelope system is that it's out of sync with today's world. People use cash less and less, and carrying cash envelopes can be inconvenient or even unsafe. If you want the benefits and structure of an envelope system but don't want to carry cash, consider using an app such as YNAB or Mvelopes that allows you to imitate the system digitally.

How to Use Envelope Budgeting to Manage Your Finances (2024)


How to Use Envelope Budgeting to Manage Your Finances? ›

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.

How do you save money using the envelope method? ›

You begin with multiple envelopes, each of which represents a budget category. You then assign a certain amount of cash to each one, based on how much you anticipate spending in that category for the month. Once an envelope is empty, you can't spend any more money in that category until your new budget period begins.

Is envelope budgeting a good method? ›

And if you regularly overspend, you might not reach those financial goals you've set. The envelope budgeting system is one way to track your money each month, and it may help you curb overspending because it limits what you have available.

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.

Does Dave Ramsey use the envelope system? ›

It really was made famous (and a lot more popular) by finance guru and radio talk show host Dave Ramsey. All you need to get started are some ordinary envelopes, either store bought or homemade. Oh, you also need to mix in some financial discipline. You'll definitely need that.

How to save $5000 in 3 months envelope? ›

You can save over $5,000 in just over three months with the 100 envelope challenge. 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.

How to save $5000 in 3 months? ›

How to Save $5000 in 3 Months [2024]
  1. Create a Budget and Plan.
  2. Pick up a Side Hustle.
  3. Sell Things Around Your Home.
  4. Refinance Debts.
  5. Cut Unnecessary Expenses.
  6. Reduce Living Expenses.
  7. Try an Envelope Savings Challenge.
  8. Use Cash Back Apps.
Apr 3, 2024

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.

What are the downsides of envelope budgeting? ›

It's labor intensive – Regularly withdrawing your income into cash will involve many trips to the bank. You'll also have to set aside time each week to figure out how much money should go in each envelope and then physically make those contributions.

How to save $5000 in 3 months with 100 envelopes? ›

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 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

How do you start an envelope budget? ›

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 money stuffing method? ›

Cash stuffing is an organization system that separates your money into envelopes for each of your planned expenses. Before filling envelopes, you set a budget for each expense that month. Then, you use the cash in the envelopes to pay for things as they come up.

What is your biggest wealth building tool? ›

“Your most powerful wealth-building tool is your income. And when you spend your whole life sending loan payments to banks and credit card companies, you end up with less money to save and invest for your future.

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.

What app uses the envelope system? ›

RealBudget is designed to bring you the simplest form of money management in the most straightforward way possible. Create monthly budget envelopes, enter transactions, and track how you spend your money each month.

How might using the envelope method benefit you? ›

The envelope system can help new budgeters and impulsive spenders. It lets you set goals and gauge how much you spend and save. Armed with a plan, you can learn how to stick to a budget and take charge of your finances.

How to save $10,000 in 100 envelopes? ›

On each envelope, write the day number and the amount you need to save for that day. For instance, on the first envelope, you would write "Day 1: $1" and on the second envelope "Day 2: $2", and so on all the way to Day 100: $100. Each day, you take the envelope for that day and put the designated amount of cash inside.

How does the 52 week envelope challenge work? ›

There are no complicated rules to remember. Week 1, you save $1.00. Week 2 you save $2.00, and it continues through the year, adding one more dollar to each week's savings goal. By Week 52, you'll set aside $52.00, which will bring the year's total savings to $1,378!

What is the envelope challenge for savings? ›

100 Envelope Challenge

To begin, gather 100 envelopes and sequentially number them $1 through $100. On day one, you'll place $1 in envelope one. On day two, you'll add $2 to envelope two, and so on. Place each envelope in a safe place, and by the end of the challenge, you'll have saved $5,050.

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