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A Quick Guide to the Envelope Method for Monthly Budgeting

September 27, 2019 by Emma Gordon

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When was the last time you received a handwritten letter in the mail? Or better yet, when was the last time you sent one?

If you’re like many people, it may be a while ago. The average American household receives just 10 pieces of personal mail each year.

You may be able to thank the Internet for that.

Compared to texts and emails — both sent and received in seconds — snail mail is a thoughtful but slow form of communication. Its slow movement through the USPS means it may not be the most efficient way of communicating.

So what are you going to do with those blank envelopes you may have lying around and possibly collecting dust in one of your drawers? Don’t recycle them yet. They can play an important role in your budget.

Here are some important things you should know about the envelope system for budgeting, including how direct payday lenders might fit into it.

What is Envelope Budgeting?

The envelope budgeting system is an old-fashioned spending plan that helps bring lofty mental budgets down to Earth. It may help you see your budget in a more concrete way by using envelopes to budget and store your money.

Here’s how it works:

First, you’re going to need to sit down with your finances and look at your expenses. Your initial task is to group your expenses into common categories. Things like rent, groceries, and cell phone bills may be some of the obvious categories but don’t forget discretionary expenses, like entertainment and clothes.

Once you know what categories you’ll be using, pull your envelopes out from their hiding space. Each category should have its own envelope, so use as many or as few envelopes as you need to make this method work for you.

Just make sure you have the right categories to cover all your spending in a typical week. By the time you’re done labelling envelopes, all your money should be accounted for.

Now, it’s time to fill your envelopes. They’ll act as temporary wallets for the cash you intend to spend in each category. Put the amount of cash you’ve assigned to each category into the corresponding envelope and do your best to not spend more money on a category than you’ve initially assigned to it.

For example, if your grocery money for the month is running low, comb through your freezer and pantry and look for leftovers you can get creative with to make dinner.  

12 beige envelopes on a white surface next to flowers

An Envelope Budgeting Example

Let’s say you’ve decided to spend $646.80 a month on groceries. This number which we’re using as an example is taken from the USDA’s thrifty food plan for a family of four (where the two children are between the ages of 6 and 8, and 9 and 11).

At the start of the month, you’re going to place $646.80 into your grocery envelope. The idea is that this amount is how much you have to spend on groceries for the month, so if you’re dedicated to sticking to this budget, you may have to figure out how to stretch this amount over that period of time.

This may involve cutting back on unnecessary items like soda or snacks, or you may find it easier to achieve this by following a meal plan.

A meal plan may be a fantastic way for you to plan your meals around your budget. It can help you think about each meal in advance, so you can better plan what you need to buy at the store.

By knowing the ingredients you need beforehand, you can decide whether a recipe fits your budget, or if you should pick something more economical. Keep looking for cheap yet tasty recipes until you can plan meals without spending more than what’s in your envelope.

Once you have your meal plan in place, it’s time to go shopping. Each time you buy groceries, you’ll see how much you have left in your envelope for the next shopping trip, until your envelope needs a top-up.

How Does the Envelope System Help with Budgeting?

In an age of budgeting apps, digital spending plans, and online banking, money management can be a challenge. It’s not always easy to keep track of where your money goes when it disappears with the click of a mouse or the tap of a card.

The issue is that you may not be constantly logging into your bank to see the changes in your balance. It’s easy to lose track of what you’ve spent if you aren’t checking, which may lead to overspending. In fact, research has shown that many people spend more money when they pay with cards over cash.

Envelope budgeting may help flip the script, forcing you to rely on a finite number of bills and coins.

American dollar bill laying flat on a white surface with 5 rolled up American bills set vertically in the shape of a v

This works on a psychological level:

It may be harder to say goodbye to cash that’s held in your hands compared to digital currency. Your wallet will most likely be thinner and your pockets may seem noticeably lighter after you shop. This difference may help you become more aware of your spending, compared to if you were to use your debit or credit card.

It also works on a practical level:

Once your envelope for a particular category is empty, you don’t have any more cash to spend in that category for the month. The fact that you may have to go back to the bank to get more money may be a deterrent to spending over your limit.

Compare this to your credit card, which may tap into the entirety of your credit limit at any time, regardless of what category you’re spending in. Compared to having to go to the bank, overspending may seem much more effortless.

How to Make the Envelope Method of Budgeting Work for You

While there are many benefits to switching over to spending cash, it’s not the only reason why budgeting with the envelope system works. It also works because it helps you set limits on each category of spending. 

To do that, you need to figure out what parts of your budget you may be overindulging in. Some people may tend to overlook saving money if they’re busy spending too much money on fun experiences and items.

You may be unknowingly doing the same, but you may not know it until you sit down and track your expenses to see how you’re spending money. You need to find out what categories you can cut down or eliminate entirely, so you can move more cash towards saving money and spending on necessary items.

Tightening your budget is just one way to get a better handle on your finances. To become a master of your cash flow, read this to learn more about better money habits.

black coffee mug on black sauce on a wooden slat table during daytime

Start with Fun Expenses

Fun categories are first on the chopping block because they may be one of the easiest to eliminate. These are expenses that you generally may not need. Although you may miss going out for dinner, seeing movies, or buying video games, you may be able to limit these items and still live your life quite comfortably.

But don’t worry if your budget is already tight. If you don’t have a lot of fun expenses you can cut out, there may be other ways to save.

What if You Don’t Splurge Often?

Budgeting advice that suggests cutting out daily lattes, weekend trips, and frequent online shopping splurges makes sense if you tend to make these types of purchases on a regular basis. But it may not help if you only indulge in a latte once every couple of months, enjoy inexpensive staycations, and don’t shop online for things you don’t need.

Cutting these expenses may not necessarily save you a ton of money, but it may make your budget feel too rigid.

If your infrequent latte is one of the few pick-me-ups in your budget, you don’t necessarily need to skip it. You may be able to find other, better ways to save on your variable expenses.

view of fresh produce in a grocery store with labels over top

Focus on Variable Expenses

Variable expenses may often be changeable, which means you may have power over how much you spend on them. If you make some changes to your habits, and you may be able to reduce your spending.

Let’s think back to your groceries as an example. Your bill at the supermarket may reflect your habits in the kitchen and the grocery store.

If you buy organic produce and specialty ingredients when you aren’t ordering takeout, your grocery bill may be a burden on your finances. But, if you start using coupons, purchasing store-brand products, and eating in more, it may take up less of your budget.

What about Invariable Spending?

Invariable spending doesn’t change month-to-month, so it may be harder to limit what you spend in these areas. They tend to be the big expenses in your budget, like rent.

Rent may be a hard expense to change compared to groceries or fun expenses. It might be your biggest expense each month, and you may be tied to what you pay by a rental agreement. Changing this may take a lot of effort, and it may likely involve a big upheaval in your lifestyle.

blonde man and woman wearing white t-shirts holding white board with black line drawing of a house in a white room

After all, it’s not like it’s easy to convince your landlord to cut your rent in half, so one of the few ways to reduce what you spend on housing if you rent is by moving.

And moving isn’t typically cheap. Between breaking your lease and renting a moving van, the cost of a move can get expensive. These upfront costs aren’t always manageable, even if the move looks like it may be able to save you money in the long run.

It may be a good idea to consider the impact these invariable expenses have on the rest of your budget, even if they may be a challenging cost to change in the moment. You may not be able to lower what you spend in these categories immediately, but you may be able to do it at some point with careful planning.

What if You Have Money Leftover?

If you have money leftover in any of your envelopes at the end of the month, then congratulations are in order! This means you came in under budget for whichever category still has cash.

You may want to celebrate by splurging on something fun for the month. Or, you may want to roll the cash into another category, so you have more money to spend in other areas of your budget.

This is a great idea if you have debt or savings you want to focus on. Making extra deposits in your savings account may help you reach your goals faster, and if you have any outstanding installment loans, making additional payments may reduce the outstanding principal balance of your loan. However, some lenders won’t allow you to make early payments without incurring an early repayment penalty, so make sure you check the terms of your loan to find out.

Making Digital Payments with the Envelope Budgeting System

You may be thinking this is all well and good for people who use cash but that this is 2019, a year when you pay bills online and Venmo money to friends. How does cash in envelopes help you if you spend a lot of your money this way?

It’s true, budgeting with the envelope system first came about before the advent of personal computers. But this doesn’t mean you aren’t able to adapt it to a slightly more modern spending plan.

A modern spending plan may include expenses you my not be able to pay for in cash — whether it’s because your landlord only accepts direct deposit payments or because it’s simply more convenient to shop online.

And that’s fine. You may keep paying for these expenses online.

smiling blonde woman in red cardigan holding glass mug sitting beside table with open MacBook and flowers

There are a couple ways to include online purchases into your envelope budget:

  1. If an online purchase is part of a category that you use cash for, make sure to add this amount towards your monthly total. It’s important to jot down how much you spend online on the front of the envelope to make sure you don’t go over the limit.
  1. Let’s say you get a short term line of credit, and you pay it off entirely online. If an entire category is paid for online like this example, you can still have a physical envelope to keep track of your spending. You won’t put cash in it, but you can write down each purchase on your envelope to make sure you don’t go over your allotted limit for the category.

How Do You Handle Unexpected Expenses?

Fast forward to a few months from now. You’ve been budgeting using the envelope system, and it may be working great. You may have committed to filling each envelope with just the right amount of cash, and you may be saving more money than before.

But what if something happens to throw you off course. For example, a usual car tune-up reveals there’s something wrong with your transmission, and the repairs may be more than you anticipated. What do you do?

an engine inside a green car

One of the easiest ways to handle these expenses may be with proactive planning. Having an envelope for short-term savings may help you cover unexpected bills and repairs.

You may be able to tap into this fund should an emergency come your way. And if something like this doesn’t happen, it’s always good to have savings regardless.

If you’ve saved up an emergency fund and it falls short of what you need to help cover the associated expenses, examine your other envelopes to see if you may be able to syphon some of the cash from these other envelopes to help with your bill. If that’s still not enough money, you may want to look into personal loans online to help you make up the difference.

Take the time to research these options carefully. There are several options available for personal loans online, including installment loans and lines of credit. Make sure you understand the products and know how to answer questions like what are installment loans?” and “what are they used for?” before you take one out.

Try the Envelope System for Budgeting

Envelopes can do more than simply help you send letters. They can be an important part of a powerful money budgeting technique that helps you to spend your cash with intention.

Put the envelope system for budgeting to work, and you may be able to cut down on overspending and potentially increase savings. Now that sounds like it may be a win-win scenario.


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