The Envelope System Explained

4 Minute Read

The envelope system is certainly nothing new—it’s been around for decades. Yet many people still don’t know exactly how it works.

So What Is the Envelope System?

The envelope system is when you use cash for different categories of your budget, and you keep that cash in envelopes. It allows you to see exactly how much money you have left in a given category by taking a quick peek in your envelope.

How the Envelope System Works

Use the envelope system for items that tend to bust your budget. Common examples include groceries, restaurants, entertainment, gasoline, and clothing.


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You don’t have to save up any money to start using the envelope system. It works like this: Let’s say you’ve budgeted $500 a month for groceries. When you receive your first paycheck of the month, withdraw $250 from the bank and put the cash in an envelope. On that envelope, write “Groceries.” When you receive your second paycheck, do the same thing again, and put that $250 in the envelope. That’s your $500 for the month for food.

No money—and we mean no money—comes out of the Groceries envelope except to pay for food at the store. If you go food shopping and leave the envelope at home by mistake, turn the car around. Make sure you take enough money to cover your groceries for that trip. If you take $150 and your total comes to $160, take some things out of the cart. Put any change back in the envelope.

When your money is gone, it’s gone! If you want to go to the store but don’t have enough money, then raid the fridge for leftovers. This is a great way to keep yourself accountable for your spending.

Reward Yourself

If you have money in an envelope at the end of the month, congratulations! That category came in under budget. It’s okay to celebrate, within reason. Reward yourself by going out to dinner, or roll the money over to the next month so you have an extra-large food budget.

Rewarding yourself is important because it keeps your spirit up. It’s tough to live on a beans-and-rice lifestyle. But you’re making it work! Great job!

Don’t Cheat on Your Envelopes

Be careful not to borrow from other envelopes. When it comes to the envelope system, it can be very tempting to shuffle cash from one category to fund another. For example, if you use up all the money in your Restaurants envelope, don’t be surprised if some inner voice tells you to reach behind that envelope for the one marked “Clothing.”

Remember, the very purpose of the envelope system is to curb your spending and teach you discipline. When you run out of grocery money, you eat leftovers instead of going food shopping. If you see your gas money slipping away faster than you planned, limit your trips or car pool.

If you have a crisis come up in the middle of the month or something happens and you absolutely have no other choice but to shift envelope funds around, call an emergency budget committee meeting with your spouse or accountability partner.

For those who are married, talk with your spouse and figure out the best course of action, adjust the budget and agree on it. Both of you must be involved—it’s a committee decision.

If you’re single, recruit an accountability partner who is committed to holding you to your budget and larger financial plan. This could be a friend, family member or coworker who you trust and know is on board with the money principles you’re putting into practice.

Remember, envelopes are powerful weapons in the fight against overspending. They equip you to go out and manage your money better than you ever have. Put the envelope system to work for you and take back control!

Want to use the envelope system but not sure how to start and keep everything organized? Check out our collection of envelope and wallet systems to find the perfect one for you!

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