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The Envelope System Explained

5 Minute Read

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

So, What Is the Envelope System?

With the envelope system (or what I sometimes call the clip system) you use cash for different categories of your budget, and you keep that cash tucked away in envelopes. You can see exactly how much money you have left in a budget category just by taking a quick peek in your envelope. How easy is that?

How the Envelope System Works

It’s a good idea to use the envelope system for items that tend to bust your budget. Think of things like groceries, restaurants, entertainment, gas and clothing.

Best of all, 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 get your first paycheck of the month, take out $250 from your bank account and put the cash in an envelope. On that envelope, write out "Groceries." When you get your second paycheck, do the same thing again, and put that $250 in the envelope. That’s your $500 food budget for the month. Simple, right?

No money—and I mean zero money—comes out of that Groceries envelope except to pay for food at the grocery store. If you go food shopping and leave the envelope at home by mistake, turn your car back around!

Make sure you take enough money with you to cover your groceries for that trip. If you take $150 cash and your total comes to $160, take some things out of the cart and put them back. I know, I know—it’s hard! But it’s better than going over in your grocery category and busting your whole budget for the month! And make sure you put any change you get back in the envelope.


Don’t forget: When your money is gone, it’s gone! If you want to go to the store but don’t have enough money, raid the fridge for leftovers. Do a pantry challenge! Dig through your pantry to see what you can find to make dinner without having to hit the grocery store. This is a great way to really get intentional about your spending!

Reward Yourself

If you have money left in an envelope at the end of the month, congratulations! You came in under budget! That’s the best feeling. And it’s okay to celebrate . . . within reason. Reward yourself by going out to dinner or grabbing a fancy latte, or roll the money over to next month so you have an extra-large food budget.

Rewarding yourself along the way is important because it helps keep you motivated. You have to celebrate those little wins along the way! And if you’re in Baby Step 2, take that extra cash and put it toward your debt snowball. Every little bit helps!

Don’t Cheat on Your Envelopes

Here’s one of the main things you have to remember: Be careful not to borrow from the other envelopes. When it comes to the envelope system, it can be very tempting to shuffle cash from one category to fund another. Let’s say you used up all the money in your Restaurants envelope—don’t be surprised if some inner voice tells you to grab that other envelope in your wallet marked "Clothing."

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Remember, the whole purpose of the envelope system is to control your spending and help you stick to your budget.

If you run out of restaurant money, eat leftovers instead of going out. If you see your gas money slipping away faster than you planned, limit your trips out and about or carpool into work. Find creative ways to make your money stretch when the envelopes are getting low!

If you have a crisis come up in the middle of the month or something happens and you have absolutely no choice but to shift your envelope funds, call an emergency budget meeting to talk it through.

If you’re married, talk with your spouse and figure out the best course of action, adjust the budget, and agree on it together. Both of you must be involved—it’s a joint decision. And if you’re single, recruit an accountability partner who is committed to holding you to your budget. 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 can help you manage your money better than you ever have. Put the envelope system to work for you and get intentional about how you’re spending your money!

Ready to get started using the envelope system? Check out our collection of envelope and wallet systems to find the perfect one just for you!

About Rachel Cruze
Rachel Cruze is a seasoned communicator and #1 New York Times best-selling author, helping people learn the proper way to handle money and stay out of debt. You can follow Rachel on YouTube, Facebook, or

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