How to Master the Envelope System

Think that budgets just aren't for you? Maybe you need to try this time-tested trick for managing your money.

Have you tried to budget but gotten overwhelmed by spreadsheets and apps? Do you wish that managing your money could be simple and easy? The envelope budgeting system might be the answer you’ve been looking for all this time.

Although this system might seem basic at first, it’s surprisingly powerful. Here’s how to start budgeting like a pro today!

What Is the Envelope System?

putting cash in envelopes

At its most basic, this budgeting system involves stuffing envelopes with cash and then spending it. Well, there’s a little more to it, but unlike many budgeting systems, this one is beginner friendly and easy to adjust, scale up or down, or tweak to suit your personal preferences.

As Rachel Cruze explains for Ramsay Solutions, “If you’re constantly going overboard in a certain category (hello, food!), then take cash out for the amount you’ve budgeted for and stick it in an envelope. When you shop for that category, only use what’s in your cash envelope. Once the money is gone, it’s gone—so this will force you to stop overspending and help you achieve your money goals faster.”

Sounds great, doesn’t it? But why does this system work so well, and how do you get started? Let’s dive in and take a look at the details.

Why Is It So Effective?

One of the greatest things about this system is that it requires no money to get started. Unlike apps or software, budgeting with envelopes is essentially free. You can fold up a piece of paper or reuse envelopes from bills if you don’t have any blank ones handy. As long as you’ve got something that’ll hold money and a writing utensil, you’re good to go.

This very low barrier to entry means that literally anyone can try the envelope system. Kids can get started with budgeting this way, but it’s also useful for people who don’t have a bank account or can’t access the internet.

Speaking of the internet, another reason the envelope system has remained so popular over the years is that it tricks your brain into being more mindful of your spending habits. Once you have to pull actual currency out of your envelopes to buy things, those purchases start to seem a lot more real than when you merely swipe a card.

Above all, the envelope budgeting method is easy. You’ll spend less than ten minutes setting this system up. No fiddling with spreadsheets. No creating an account on a website. No excuse not to get started today!

Who Can Benefit from This System?

putting cash in envelopes

Anyone can benefit from the envelope budgeting system, also called “cash stuffing” on TikTok, but it’s especially helpful for chronic over-spenders. It’s so easy to lose track of how much you’re spending if most of your transactions involve swiping a card or using a cash app. If you’ve ever checked your bank balance or opened your credit card statement only to find that you barely remember the majority of the charges, you’re not alone.

Actual scientific studies have found that people spend more when they pay with plastic instead of paper. With the prevalence of cash apps that make paying as easy as tapping a button, it’s even easier to go over budget. According to The Balance, “This tendency was demonstrated in a 2001 study conducted by Drazen Prelec and Duncan Simester of MIT’s Sloan School of Management. The study found that participants were willing to pay more for a purchase, specifically tickets to a basketball game, when they used credit cards over cash.”

Most of us wouldn’t dream of leaving home without a couple of cards in our wallets, but the cash envelope budget encourages you to ditch the plastic. This trend is especially popular among Gen Z. While older Millennials remember the early days of ATMs and debit cards, the younger generation has grown up in a world where payments are largely electronic and intangible. But using cash isn’t just a cute retro trend—it’s also a really smart way to manage your money.

woman about to spend too much money online

As an article from Mint explains, “This money management strategy forces you to accurately budget your expenses each month by only giving you access to a predetermined amount of money, and the goal is to teach you to gain better control of your finances.”

Read More: Money 101: Essential Financial Advice for College Freshman

How to Get Started

putting cash in envelopes

In order to get started with the envelope system, you’ll need a few envelopes, something to write with, and cash. But how many envelopes and how much cash?!

Don’t panic. Grab a piece of paper and jot down spending categories. If you spend money on anything on a semi-regular basis other than fixed living expenses, write it down here. This part will be personal to you, but here are some ideas to get started:

  • Groceries
  • Dining Out
  • Pets
  • Clothing
  • Entertainment
  • Jewelry and Accessories
  • Transportation
  • Charity
  • Household Supplies
  • Personal Care and Toiletries
  • Gifts
  • Date Nights
  • Coffee
  • Hobbies
  • Fun Money

Notice that there aren’t any categories for recurring bills like insurance or rent. That’s because those expenses tend to be fixed, paid online, and aren’t likely to be areas where you mindfully overspend. If your basic living expenses are more than you can afford, then the cash-stuffing budget isn’t going to help that much. However, this system can work wonders if you simply have trouble figuring out “where the money goes” each month or can’t seem to curb your impulsive spending.

Take a look at your list and underline the categories that give you the most trouble. For example, if you know that your Starbucks habit is taking up too much of your discretionary income each week, then “Coffee” could be one of your categories. The same goes for those of us who can’t stop buying shoes or craft supplies. Once you’ve picked out at least three but no more than seven categories, just to keep things manageable, start allocating funds. Jot down your take-home pay for each paycheck and subtract your fixed expenses. (For monthly expenses, divide the total by the number of paychecks you get each month.) Don’t forget to put a percentage of your paycheck in savings! The money that’s left over is yours to budget as you want.

Let’s say you choose five categories: Dining Out, Entertainment, Personal Care, Clothing, and Hobbies. You have $250 to divvy up between those categories, but it doesn’t necessarily make sense to just assign each of them $50. Instead, it might break down like this:

  • Dining Out: $100
  • Entertainment: $50
  •  Personal Care: $25
  • Clothing: $50
  • Hobbies: $25

To succeed with this system, you need to be honest with yourself about your spending priorities. You may also need to build up your willpower, as the temptation to “cheat” can be strong. Remember, you can increase or decrease these amounts the next time you get paid—or even add or eliminate categories as needed. The envelope system is flexible and lightweight.

Are There Any Downsides?

Image of a beautiful happy optimistic young girl student indoors studying using mobile phone holding credit card.

There are a few drawbacks to the envelope system. First, there’s the issue of willpower. If you can’t make yourself stick to any budget, then this might end up being an exercise in futility. While you should be patient with yourself as you learn a new skill—in this case, money management—try not to make excuses or rationalize why this time, it’s okay to make an exception.

In theory, once an envelope is empty, you can’t spend any more money on that category. If you aren’t careful, you’ll run out of money for something really important, like gas or food, before your next paycheck. You may be tempted to shift money around or decide that you’ll “borrow” from your next paycheck, but that kind of mindset is the reason you so desperately need a budget in the first place. Stay strong and stick to it.

Another drawback is that you’ll need to get your hands on a decent amount of cash each paycheck. Many of us have gotten so used to living a cash-free lifestyle that it can seem inconvenient to run out to the ATM on a regular basis. Plan to pick up your cash on the same day you’ll run other errands so that you don’t waste a trip.

Young couple sitting on couch looking at laptop screen in concern

It can be difficult to get your partner or family to agree to this system, and you may find that it’s best to use cash stuffing if you’re single or only need to manage your own discretionary income. That’s not to say couples can’t use this system, but each person would need their own envelopes and their own categories.

Read More: When Couples Should Combine Their Finances — and When They Shouldn’t

Spending cash means you can’t rely on your statements to provide information about your purchases. You might find that you end up even more confused about what happened to your money unless you save your receipts. If that’s the case, consider writing down each purchase, along with a running total, on your envelopes. You can also take a snapshot of receipts with your phone in case you need to reference them later. There are many apps out there that can manage your receipts, but if you want to go old-school, just put the paper receipts in their respective envelopes as you spend money.

Finally, there’s the very real concern over carrying cash. It’s a good idea to only bring as much money as you need to spend on particular errands or events instead of your entire stash. If you’re going out for coffee, bring a $20 bill and not a binder of cash-stuffed envelopes. Be smart and savvy, and you’ll end up saving more money than you ever thought possible!

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