How to Use the Envelope Budgeting System

What Is the Envelope System?

The envelope system is a way to physically manage your budget based on different categories expenses. You set a monthly amount of cash toward different categories, like groceries, gas, and entertainment, and you put the cash in envelopes in accordance with the category.

The envelope budgeting system helps you avoid overdraft fees and other debt that might occur from swiping your debit or credit cards in places where you can use cash. The physicality of cash also makes you more aware of how much you’re spending on a certain item and can help curb any overspending habits you have.

How to Use the Envelope System for Budgeting

The envelope system is a simpler saving method than investment accounts. You won’t have to worry about asking a professional finance expert or accountant for help. You can use the envelope system to save money on your own at home. All you’ll need are envelopes, a pen or marker, and the amount of cash you want to use.

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Make a Category List for Your Budget

The first thing you should do when using the envelope system is figuring out what areas in your life you want to include the budget. These might be areas where you feel like you easily overspend. They may also be areas where you want to carefully monitor how much you spend. Some areas might be groceries, gas, hair maintenance, entertainment, and restaurants. Once you choose your categories, assign each one to an individual envelope. Use the pen or marker to write each category on its corresponding envelope.

Figure Out the Budget Amounts

The next thing you should do is pick the maximum monthly amount you want to spend in each area. Use your receipts, bank statements, and credit card transaction lists from the past year to estimate how much you typically spend each month in the different categories. It’s okay to adjust the amount if you feel it’s necessary. If you usually spend $500 a month eating at restaurants, you can decrease the amount to $250 for the sake of saving more money. Challenge yourself but also be fair and realistic according to your livelihood. Once you pick the amounts for each category, use your pen or marker to write it on the relevant envelopes.

Add Cash to the Envelopes

Once you’ve figured out the categories and amounts to include in your envelope system, the final thing you’ll need is cash. Make sure to put the exact amount of in each envelope. You can input the cash in the envelopes according to your pay schedule if that’s helpful. If you get paid biweekly, put $125 in cash in the restaurant envelope your first pay day. Then, put the remaining $125 in cash in the same envelope on your final pay day. This will set you up with $250 in your restaurant envelope for the start of the following month.

Spend Only What’s in the Envelope

Not only can the envelope system help you budget your finances, but it can also build your self-discipline. Because you’ll only have a certain amount of cash in each envelope, the different amounts will help you challenge your spending habits. Before leaving to go to the grocery store, gas station, salon, or elsewhere, think about how much cash you’ll need from the relevant envelope. If you know that you like to go out to eat once a week, you might want to only take $50 with you each time you to ensure that your restaurant envelope lasts you the entire month. Never pull cash from another envelope—even if the category you need is out of cash. Instead, use the lack of cash in a certain category as inspiration to cut your spending habits down the following month.

Once you get the hang of the envelope system, you can watch your debit and credit card spending decrease. You might even become so disciplined that you have cash left in some envelopes at the end of the month. Remember to only use the envelope budgeting system in areas where you can shop physically and pay with cash. You can explore more budgeting tips to get ahead of your finances by visiting the Microsoft 365 Life Hacks budgeting hub.