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When you're ready to get started with budgeting, there are countless apps to explore and other digital methods that help you organize expenses and set spending limits. But as easy as it is to download an app or create a spreadsheet, it's even easier to let it go unused—especially when there are probably a dozen things you'd rather do when using your phone or laptop.
Enter envelope budgeting. This method suggests using actual envelopes—yes, paper ones—to set aside cash each month for specific expenses. It's old-school, but it's also tactile and satisfying for budgeters who want a clear system that will limit the temptation to overspend.
Whether you're new to budgeting or want to give the envelope system a try because other options haven't worked, here's what you need to know.
First, a primer on budgeting: The key elements of making a budget are understanding your income and taking stock of expenses. The golden rule is to spend less than you earn, which allows you to save money for near-term emergencies and the far-off future. It can also help you protect your credit by limiting the possibility you won't have enough money to pay bills.
To budget, take a look at your monthly take-home income, meaning the amount you receive in your bank account after taxes. That's your starting point. Then, identify your main spending categories: housing, transportation, groceries, meals out (including restaurant meals and takeout), child care, debt payments, entertainment and others.
A budget will help you figure out how much to spend in each category so that, overall, you'll have some left for saving and paying extra toward debt. You may be less likely to overspend on entertainment, for instance, if you know that overdoing it will have ripple effects on your other budget categories. Budgeting reinforces discipline and accountability, but in the end, it's up to you to stick to the system you've defined. After all, a budget does no good if simply you ignore it.
There are a lot of ways that budgeting can go wrong—many budgeters abandon the method they've chosen, perhaps because it became too tedious or because overspending one month threw their budget out of whack. But understanding that it's a process of trial and error, and experimenting with different methods, can help.
How Does Envelope Budgeting Work?
The envelope budgeting system is a simple approach. Take these steps:
- Divide up expenses into different categories. These categories depend on the individual, but examples include groceries, entertainment, car maintenance, hair care, restaurants—the more specific, the better. It might be overwhelming to budget all of your money this way, so you might start by choosing three or so categories that you're most prone to overspending in, and add more categories as you grow comfortable.
- Choose a specific amount you want to spend. Each category gets a spending limit for the month, so you'll withdraw cash in that amount and place it in the corresponding envelope. You can withdraw half the amount when you receive your first paycheck and the other half from your second paycheck. Write the total you'll plan to spend on the envelope. That's your budget, and you'll spend only that amount for the month. Bring the envelope (or enough cash to cover the purchase) with you when you go grocery shopping, for instance, or get a haircut, and spend the cash directly from the appropriate envelope. Be sure to put any change leftover back into the envelope.
- Move money around as needed. Ideally, you won't pull money from one envelope to another, because the system works best when you truly stick to the budget you've set for each category. Then again, it might take a few months to identify the right limits to set. You can get ahead by looking at bank and credit card statements for how much you spend in certain categories before you make your first envelopes, but if you miss the mark, simply make adjustments.
Can You Use Envelope Budgeting With Credit Cards?
A drawback for many people is that envelope budgeting relies on cash. If you use cash to pay for everything, you'll lose out on credit card rewards and the simplicity of automatic expense tracking.
One option is to use envelope budgeting for certain expenses only. If you've noticed that takeout meals are a big drain on your budget, for instance, you can use envelope budgeting to limit the amount you spend in that category. You'll set aside $100 per month, for example, and only use the cash in that envelope when you order food. You can still use your credit card or direct debit from your bank account for automatic bill payment for other expenses, but stick to the envelope method for certain spending categories.
Or you can use budgeting software that applies the same general principles of envelope budgeting. Online budget apps, for instance, allow you to digitally sort every dollar you earn into different categories. You could create a category so credit card payments have their own "envelope" within the app, so you can keep track of purchases you've made that you plan to pay off with your next credit card bill.
For instance, say you pay for $100 in groceries with a credit card; $100 will come out of the "groceries" spending category that you've already allocated money toward. Once you've made the purchase, you'll enter it into the app and move the amount to the "credit card payments" category. You'll be able to benefit from your use of a credit card (since many cards provide rewards, fraud protection and other perks) while still budgeting a specific amount for groceries and sticking to the budget.
Other Budgeting Systems to Try
There are other methods that could work instead of, or alongside, the envelope method:
- The 50/30/20 budget: Instead of identifying many spending categories, you'll split your budget into three broad classifications: necessities (which you'll put no more than 50% of your income toward), wants (30%) and savings and debt payoff (20%). This budget method can even complement the envelope budgeting method by helping you break up expenses into big categories first so you can make sure your overall spending is balanced. Then you can create envelopes for each subcategory within the broader buckets of necessities, wants, savings and debt repayment.
- Zero-based budgeting: Like envelope budgeting, the zero-based method sorts your money into multiple categories. But it is more restrictive than envelope budgeting in some ways, since it requires you to sort every dollar you earn into a category rather than using envelopes only for certain expenses. On the other hand, it allows you the freedom to move money between categories if necessary. It can be a useful system for budgeters who want a really hands-on approach; the You Need a Budget app, for example, is built on the zero-based budgeting method.