Whether or not you follow a monthly budget, you’ve probably considered putting one together. After all, a household budget is supposed to act as our financial GPS, showing us when we’re headed in the right direction and when we’ve veered off the path. One method of budgeting is called the envelope budgeting system. 

Physical envelopes

As the name suggests, envelope budgeting involves using envelopes to keep your finances straight. Here’s how it works in seven steps:

Step 1: Create a budget

List your monthly expenses. Include fixed expenses, like rent, auto payment, and utilities. Also include variable expenses, such as groceries and entertainment.

Step 2: Assign money to each expense category

Next to each expense, jot down which category it belongs in and how much you’re budgeting. You’re free to set it up in a way that works for you, but the following gives you an idea of what should be included.

Expense	Category	Budget
Rent	Housing	$1,200
Groceries	Groceries	$500
Car payment	Transportation	$250
Gasoline	Gasoline	$160
Auto insurance	Insurance	$150
Electricity, Gas, Water, Trash, Sewer, Recycling	Utilities	$250
Dining out	Miscellaneous spending	$200
Clothing	Clothing	$200
Pet food and vet appointments	Pet care	$185
Entertainment	Entertainment	$200
Gifts	Miscellaneous spending	$100
Debt payoff	Debt	$200
Vacation	Vacation	$150
Hair salon, hair care items, makeup	Beauty	$200
Shampoo, soap, sunscreen, lotion	Personal care	$75
Savings	Savings	$200

As you can see, there’s nothing special about the list, and any way you set it up can work. The point is to create the number of categories that make it easy to know where you stand financially at any given time.

Step 3: Prepare envelopes

Create an envelope for each spending category and write the category name on the front.

Step 4: Fill envelopes

At the beginning of the month or your pay period, withdraw the cash you’ll need to cover your budget. Fill the envelopes according to how much you’ve allocated for each.

Step 5: Draw from envelopes

Let’s say you go grocery shopping. Draw money only from the “grocery” envelope. When it’s time to fill your car, you use money from the “gasoline” envelope.

Step 6: Track your spending

Keep an eye on spending to ensure you’re not overspending in any category. Once you’ve emptied an envelope, you shouldn’t spend more in that category until the next time they’re filled up.

Step 7: Make adjustments

Knowing if you’ve allocated money properly can take a few months. For example, you may overestimate how much you spend on groceries but underestimate how much you need for utilities. It’s okay to tweak the amounts allocated to each category until you have it right.

Pros and Cons

Because no budget will work for everyone, the envelope budgeting system will be perfect for some and not so great for others. Here’s a quick rundown of some of the pros and cons:

Pros of the envelope budgeting system

• Improved awareness of spending: Once you’re in the habit of pulling cash out of an envelope to make a purchase, it’s next to impossible to remain unaware of how much you’re spending. 
• Limits overspending: One of the rules associated with the envelope budgeting system is that once an envelope is empty, there’s no more spending in that category until the next time the envelopes are filled. Budgeters who stick with the rule are far less prone to overspend.  
• Encourages saving: The envelope budgeting system reminds you to budget for savings like you would for any bill. 
• Simplifies budgeting: With envelope budgeting, there’s no going through a spreadsheet or app to figure out how much you’ve spent and how much you have left. If you have a question about any category, knowing where you stand is as easy as looking inside the envelope. 

Cons of envelope budgeting system

• Lack of flexibility: Most of us are accustomed to deciding how to pay for something on the fly. We can use cash or pull out a card if that’s more convenient. Once you’re committed to this system, you lose that flexibility.
• Less secure than credit or debt: There’s no denying that carrying cash is generally less safe than a virtual wallet or plastic card. If you lose a credit or debit card, you can immediately report it and minimize the amount of money you lose. That’s not true of cash. 
• Not always convenient: Most people leave their cash-filled envelopes at home. That’s not at all convenient if you spontaneously find something you’d like to buy while away from home. 
• It could take time to adjust: As mentioned, you’re free to tweak the envelop budgeting system as needed. However, figuring out what works best for you and your budget may take months. 

Why any of this matters

Building a household budget may not be the most exciting task on your to-do list, but it’s essential. A budget shows you where your money goes and helps you decide when and if cuts should be made. A good budget can help you reach your financial goals in less time and with less headache. 

If you’ve tried other budgets and they just haven’t worked for you, you may find that the visual cues associated with the envelop budgeting system are a better fit. The worst that could happen is that you’re not wild about it and move on to another budgeting system, meaning you have nothing to lose by trying. 

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