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Budgeting with the Envelope System

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One of the popular ways to stick to a budget is by divvying out cash amongst labeled envelopes. The labels correspond to your necessary expenses, savings goals, play money, etc. There are a few advantages to the Envelope System:

  • Those who do better with the physical representation of money can visually see where the money is going.
  • You can't over-spend with this system. If the envelope is empty the spending is done.
  • It eases the temptation to dip into savings. Since you've already allocated the money there, you have to make the most of your play money

Budgeting with the Envelope System has been around for a long time, but Dave Ramsey seems to be a notable proponent. Envelopes are very well suited for his target audience, people who have amassed a large amount of debt (see the second point above about not over-spending).

How does the Envelope System work?

I already explained how it works above, but here's a video that walks you through it. In general people use the Envelope System because they are visual... so what better way to learn it than a video? This Envelope System video tutorial is from No Credit Needed (NCN):

Disadvantages to the Envelope System

I don't use the Envelope System myself. Why? There are a few reasons. I simply don't use cash when I can get reward points on my credit card (and pay it off every month). I'm not one to do a lot of work (hence the website name) and I'm not sure what I'd do with the money for utilities in cash when a check is required. Am I supposed to go back to bank and deposit it? Also in the video, NCN suggested carrying $400 in cash around with you all month. I know you could just carry $100 for the week, but wow, that's a little more cash than I like to carry.

This is probably just the right time to note that there are a few online systems that help you manage an Envelope System. I'll try to cover some of those in the next few days. Your bank may also allow you to have sub-accounts. That's really helpful because you can then funnel money to a vacation account or a new car account - perhaps even schedule deposits to go there automatically each month. Years ago my bank didn't allow for this. However, since it was bought out by Bank of America, I should look back into it. Sub-accounts would be a great Lazy way to implement the Envelope System.

Do you use the Envelope System? If so, how has it worked for you? Do you find it a lot of work or does just take a minute or two a day?

(Note: You may have also heard or read about a jar budgeting system. As far as I can tell it's the same as the envelope one, but it's attributed to Secrets of the Millionaire Mind by T. Harv Eker. Expect my article on microwave container budgeting any day now. I follow that up with one on cereal bowl budgeting.)

Posted on August 24, 2009.

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17 Responses to “Budgeting with the Envelope System”

  1. I like the idea of an envelope budgeting system but like you, I don’t like carrying cash and I prefer to use my credit card for rewards (I get 2% cash back on everything). I just make sure I payoff the balance in full when the bill comes.

  2. Glad to see I am not the only one who doesn’t use the envelope system. I rarely have more than $40 dollars in my wallet and prefer to put everything on my rewards card. It helps me keep track of expenses and get cash back.

    I think the envelope system was developed for people who had little control over their spending and needed a physical way as you mentioned. Many studies have been shown that people using a credit card will spend more than one paying cash.

    Being aware of your spending is always the first step to controlling it.

  3. Matt says:

    An Envelope budget does not need to rely on physical envelopes to work. I use a program called Budget from snowmintcs.com (not affiliated, just a happy customer). I spend about 1/2 – 1 hour a month downloading bank & credit card transactions and then importing them into the program. Things get categorized into different envelopes and I get a quick look at how I did for the month.

    Granted, it isn’t a ‘true’ envelope system because it does allow you to go negative in an envelope, but I do like the ‘envelope philosophy’ more than a traditional budget. Envelopes allow me to create a place to set aside money for mid/longer term savings goals and at a single glance say, “Yes, I may have $1,000 sitting unused in my bank account, but it’s already been set aside to pay for a new computer.” I like being able to earmark money for certain goals, so that even though my bank account may appear to have excess money in it, I know that every dollar has been put towards something specific.

  4. jbickford says:

    I was always interested in giving Mvelopes (http://www.mvelopes.com) a try. Has anyone tried or seen any success with a digital envelope method?

  5. Craig says:

    I agree with Singleguymoney. The envelope system works in theory, but I do not want to keep envelopes of cash lying around and it can get more confusing the more categories you set up to save for. I like the idea of budgeting and can see the system working more for specific savings goals.

  6. MichaelM says:

    I’d rather have my money earning a few cents in an online account than in a physical envelope. I also like getting the % back from my credit card. I also dislike going to the bank if I can help it!

    Direct Deposit + ING Online Bill Pay + Credit Card = Happyness & Simplicity

  7. Kirk Kinder says:

    @jbickford: Mvelopes is a solid system. I tried it just to see how it works, and it does a decent job of replicating the actual act of using envelopes.

    I don’t use it anymore as I don’t have problems budgeting. I use mint.com now. It is a great tool and provides up to the minute projections. Plus, like many other contributors, I get cash back from the credit card.

  8. Dave says:

    I’m a visual person, so I like the enevlope system, for someone that doesn’t want to carry cash, use some monopoly money, it’s just a way of balancing your accounts, when you write a check, use your plastic, tranfer funds, take the monopoly money out of said envelope.

  9. Jen says:

    My husband and I have just finished our first month using a dry-erase board “envelope” system and it’s worked out great. We use debit cards for purchases so a cash based envelope system was not practical. Instead, we start the month by listing the full amount of each of our flexible/variable budget categories on the board and subtract as purchases are made (things like leisure, groceries, personal care, gifts, clothing, etc … not including regular bills that are the same amount each month.) We also keep computer records, but there is something about the manual system of writing it on the board and the visual reference of seeing the numbers every day that keeps us on our toes!

  10. Michael - The Fat Loss Authority says:

    Sounds good for beginners who don’t realize where their cash is spent on daily/weekly basis.

    I rarely carry more then $25 in my wallet. Credit cards and rewards is the way I roll:)


  11. Matt says:

    Part of the reason for carrying actual cash is that psychologists have found that the brain actually registers PAIN when you spend cash. It registers less if you use a debit card and almost none when using a credit card. Using cash actually causes you to spend less. Of course bills can be paid online on by check but discretionary money will go a lot farther if you use a cash system.

    • Lazy Man says:

      This is not true for all people. There are a subset of people, like my wife, who have the opposite reaction. For her cash is extremely easy to spend since it’s a quick transaction. Credit cards require waiting and signing and associated with things that we need (i.e. groceries, home goods, etc.), so she actually consciously limits the cash on hand so that she doesn’t spend it on a bunch of small stuff like coffee, candy bar, etc. It prevents her Latte Coffee Factor from getting out of hand.

  12. I am a student in college and get paid every two weeks. Each paycheck ranges from $150-$175 (can’t say I totally love minimum wage, but I have a job…not complaining). I plan on starting to use the envelope system next fall because if I have the money physically there, I know exactly how much I have to spend. I’m also going to leave a bit of money in my checking account so that if I need to use my card I can.

  13. Sheri says:

    I love how the envelope system works for us. My husband is a server so we only get paid in cash and that cash is paid daily. I bought a Home/Office budget book from the offcie supply store and it is a spreadsheet. On the left is all our envelope categories and up top is the day. When he comes home from work I get the cash and divide it into as many categories as I can before running out of money. I have a set amount that I put into each category per day. At the end of the month after all bills are paid I put any money left over into a savings account. And to pay bills I either put the money into my checking and pay online or I go up to the pls store and get a free money order and mail it. When we start getting actual paychecks from his new job I will probably implement an online envelope system that has been mentioned. Hope this helped someone.

  14. Max R says:

    I live paycheck to paycheck myself, that’s why for me it’s crucial to be able to track all of my spending and make sure I don’t go over my monthly budget. Doing it like in the old pen and paper days doesn’t work for me anymore. I switched from Excel budgeting to online programs. It’s much easier to know where your money is going with an online software.

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