How to use the envelope budget system

The first step to spending less and saving more is to know exactly where all of your money goes each month. But there are many ways to create a budget and stick to it. So how do you know what system is the best? I’ve always felt that it’s whatever one you stick to the longest, whether it’s high-tech, low-tech, linked to your credit card, or something you input manually. 

Envelopes labeled "restaurants," "travel," and "groceries," with rubber stamps laid out to spell "budget"An option to consider, especially for beginning budgeters, is the envelope budget system. The basic idea is to pay for as much as possible with cash, and store that cash in separate envelopes for different budget categories. It’s a great way to easily visualize how much money you have left, and some people find that paying for everything with a dwindling stack of cash rather than a card helps control spending.

As a user of the envelope system myself, here are the steps I took to set up my budget, and how I organized my envelopes in my trusty planner.

Step 1: Create a budget

Sit down with a spreadsheet, pad and paper, or download our budget worksheet here. Start by writing down your take-home pay for a full month and add any additional monthly income you consistently receive. That will be the amount you cannot go over.

Next, pay yourself first by creating a budget category for your savings. If you need help choosing a goal or deciding how much money you should save each month, America Saves can help you set a goal and make a plan here

Then list your expenses, starting with bills that stay the same each month such as your rent/mortgage, health insurance, home insurance, utilities, etc. If you make a payment every few months, such as a quarterly car insurance premium, work out how much it ends up being per month. Write these down as additional categories.

Finally, add discretionary spending categories. They commonly include:

  • Groceries
  • Dining
  • Entertainment
  • Gas or public transit
  • Pets
  • Gifts
  • Clothing
  • Household goods
  • Charity/tithing
  • "Anything goes" money (a new book, manicure, or smoothie at the mall)

Step 2: Automate

The most effective way to save is automatically, so have your employer direct deposit your monthly savings goal amount into a retirement or savings account, or set up an automatic transfer from your checking to savings account. It keeps your savings out of sight and out of mind – so you’re not tempted to dip into it if you overspend in one category of your budget.

Then set up your monthly bills that you can’t pay in cash as part of your envelope system to auto-pay to ensure that they are paid on time, in full every month. The idea is to limit all of the spending you have to think about throughout the month to cash.

Step 3: Create an envelope for each discretionary spending category

Envelope labeled "groceries" and a $5 bill sitting on top of a plannerLabel an envelope for each discretionary spending category that you created in the first step. On the back, write down the amount you have to spend in the category for the month. Some people prefer to use a coupon binder or accordion file for this.

I like using colorful envelopes from stationary sets in the dollar section of my favorite big box store. They’re the perfect size to hole punch and stick into my planner. I reuse the same envelopes month after month, so I reinforced them with a bit of colorful washi tape.

Step 4: Pay in cash, and only cash

Envelope full of cash and list of what grocery stores the money has been spent at in the last month along with amounts spentThe only way this budget system works is if you use cash, and only cash. If you go to the grocery store, you can only use the money from the grocery store envelope. And when that money is gone, it’s gone.

Some people like to keep their receipts in the envelope as a handy place to store them if they need to refer back to them or make a return later. That part is up to you.

Step 5: Record your spending on a card or on the back of the envelope

Every time you use your cash, write the amount on the back of the envelope and keep a record of how much money you have left in that envelope/budget category for the month. Alternatively, you can keep your record inside of the envelope so you can reuse the envelopes.

Step 5: Save the extra

Envelope labeled "groceries" on top of a stack of envelopes filed into a daily plannerIf you have leftover cash in your envelope at the end of the month, deposit it in to your savings account.

Do you have any tips or tricks for someone using the envelope budgeting system? Share them in the comments below.

Need motivation to save? Let America Saves help you reach your savings and debt reduction goals. It all starts when you make a commitment to yourself to save. Take the first step today and take the America Saves pledge to save money, reduce debt, and build wealth over time. And it doesn’t stop there. America Saves will keep you motivated with information, advice, tips, and reminders to help you reach your savings goal. Think of us as your own personal support system.

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