How to Use the Envelope Budget System | Capital One (2024)

October 12, 2023 |6 min read

    If you’re considering creating a budget or revamping your existing one, there are a few different methods you could use.

    The envelope budget system is one way that could help you control spending and make more purposeful choices about your money.

    Key takeaways

    • Envelope budgeting is one way to manage variable expenses into categories using either physical or digital envelopes.
    • Once the money from a category is gone, you can’t spend again until you’ve added more money back.
    • Some may choose to take a digital approach to this budgeting style to avoid carrying cash.
    • Envelope budgeting can help give you a more visual perspective of your spending habits.

    What is the envelope system?

    Envelope budgeting is a budgeting system that focuses on discretionary spending—basically the money that’s left over after necessities and fixed expenses like rent are paid.

    The system uses physical or digital envelopes to separate expenses into categories. Each category is assigned a set amount of money—more on how amounts are determined below. Once the cash in each envelope is gone, you’re done spending until more money is added, which is typically at the start of a new month or pay period. 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. These are the ideal types of expenses to include in envelope budgeting and make into spending categories.

    Here are some categories that may be included when using this type of budget:

    • Groceries
    • Entertainment
    • Dining out
    • Gas
    • Clothes
    • Personal care items
    • Managing subscriptions
    • Miscellaneous

    The envelope budget system can work well for those who like having a visual of how their money is being spent. And the good news is that this method can also be adjusted to work with online spreadsheets and other budgeting tools.

      How does the envelope budget system work?

      1. Figure out your total monthly income from sources like your job, side hustles, investments, alimony or child support payments.
      2. Evaluate your current expenses and break them down into categories. Remember, the envelope system is usually focused on variable expenses, like groceries and gas, which change slightly every month.
      3. Once you’ve chosen which variable expenses to set aside money for, write each category name on its own envelope.
      4. Pick the dollar amount you want to allot to each category and write the amount on the envelope. If you’re unsure of how much to assign to a category, you could refer to bank statements from the past few months for a better idea of how much you spent in those categories.
      5. Once you get paid or receive money, take the funds out from your bank or an ATM. Divide up the cash and put the designated dollar amount in each envelope according to what you decided and wrote on each envelope before.
      6. Once all your cash is divided up, you’re ready to use the money from each envelope as needed. To make it easier to see how much you have left, you can consider writing down what you spent—or how much is left—on the back of the envelope every time you take money out.
      7. When you’ve used all the money from an envelope, the idea is to avoid spending any more in that category until the envelope is replenished with more cash.
      8. You can dip into another envelope to cover an expense if needed. But if you’re repeatedly needing to do this, you may want to adjust your budget.
      9. Money that’s left in any envelopes at the end of the pay period or month can be saved for next month or used to build an emergency fund, save for a trip or pay off debt.

        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.
        • Leftover cash can go toward savings or other financial goals.

        Cons of using cash envelopes to budget

        • It requires carrying cash.
        • Some people would rather use a credit or debit card to make purchases, in which case a digital system might be a better fit.
        • Separating expenses and dividing money can be tedious.

        Using the envelope budget system with mobile banking

        If you like the concept of envelope budgeting—but not necessarily the idea of using physical cash—you can modify this approach to a digital-based system. This can help avoid an ATM trip and alleviate some of the worry about carrying cash.

        One of the ways to use a digital approach is to use an app. Or you can create a spreadsheet yourself to keep track. You could make columns to serve as virtual envelopes that represent your monthly spending categories. And each time you make a purchase, adjust the amount in the column to reflect the new total. Then reset the columns when a new month begins.

        Alternatives to the envelope budget system

        The envelope budget system may not work for everyone. Here are some other ways to manage your money.

        50/30/20 strategy

        The 50/30/20 approach to budgeting groups expenses into three budget categories—needs, savings and wants. This method recommends setting 50% of your budget toward needs, 30% toward savings and 20% toward wants.

        Zero-based budgeting

        With the zero-based budgeting approach, you decide how you want to use every dollar of income. This means subtracting all your expenditures from your earned income. And any money that’s left over should be put toward a planned expense—like saving money, paying off credit card debt or investing—until you reach a $0 balance. In some cases, a credit card balance transfer may also be considered.

        Pay-yourself-first approach

        This type of reverse budgeting works by ensuring all your monthly obligations and savings goals are funded first—without taking on more debt. And then whatever is left over can be spent however you see fit.

        Envelope budgeting in a nutshell

        The envelope budget system can help you build better financial habits and make intentional choices about how you spend your money. If using physical cash isn’t the best option, a digital approach or a different type of budget might be better.

        Of course, envelope budgeting isn’t the only way to work on your financial health. You can also learn some other money management tips to help you improve your finances.

        Khan Academy Financial Literacy course

        Find practical tips and step-by-step guidance in this free online course to help you budget and save like a pro.

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        How to Use the Envelope Budget System | Capital One (2024)


        How to Use the Envelope Budget System | Capital One? ›

        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.

        How do you use the envelope budget system? ›

        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 use the envelope budget system without cash? ›

        How to Hack the Cash Envelope System to Forgo Using Cash
        1. Use Gift Cards. Instead of stuffing your spending envelopes with cash, use gift cards. ...
        2. Use a Budgeting App Based On the Envelope System. ...
        3. Use Multiple Accounts for Different Types of Spending. ...
        4. Track Your Spending After Every Transaction.

        How to do the envelope money saving? ›

        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.

        How can you use the envelope method of budgeting to monitor cash flows? ›

        You just take the exact amount of cash you've budgeted for each category and stick it in individual envelopes. Then throughout the month, you check your envelopes to see what's left to spend—because you'll see the literal amount in cash. Right there.

        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. Let's take a closer look at each category.

        How does the 100 envelope challenge work? ›

        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 downside to cash envelope system? ›

        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.

        Is a cash envelope system worth it? ›

        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.

        How do you cash stuffing for beginners? ›

        If you want to try out cash stuffing, follow these steps:
        1. Step 1: Make a budget. Allocate your income into designated spending categories, accounting for wants, needs, debt repayment and savings. ...
        2. Step 2: Label the envelopes. ...
        3. Step 3: Stuff the envelopes. ...
        4. Step 4: Only spend what's in the envelopes. ...
        5. Step 5: Repeat.
        Mar 1, 2024

        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.

        How to save $4,000 fast? ›

        How to Save an Extra $4,000 a Year
        1. Step #1: Look at Your Budget. “The first step in being able to save is to do a deep dive into your budget. ...
        2. Step #2: Figure Out Where to Cut Spending. ...
        3. Step #3: Determine Where Most of Your Money Is Going. ...
        4. Step #4: Sexy Math. ...
        5. Step #5: Set Up Automatic Transfers. ...
        6. Extra Tips.
        Jan 7, 2019

        How to save $5000 in 12 months? ›

        Break It Down Into Months

        If you want to save $5,000 in one year, you'll need to save approximately $417 a month. That's about $97 a week. Saving almost $100 a week may be a lot depending on your finances.

        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.

        What does the envelope method work well for? ›

        The envelope method works well for those who don't want to have to write down every expense. All that is needed are some envelops, a pen and some cash. On each envelope, write the category from your budget and the amount of money you can send. The money that is allocated on the envelope can be for any timeframe.

        What is the pay yourself first strategy? ›

        What is a 'pay yourself first' budget? The "pay yourself first" method has you put a portion of your paycheck into your savings, retirement, emergency or other goal-based savings accounts before you do anything else with it. After a month or two, you likely won't even notice this sum is "gone" from your budget.

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

        Take stock of your savings At the end of 100 days, you'll have 100 envelopes containing $5,050. That's right—1 + 2 + 3 + 4 and every other number through 100 equals just over $5,000.

        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.

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