Envelope Budgeting: A Cash-Based System


November 5, 2020

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*Disclaimer: This is a cash-based budget system. Due to the COVID-19 pandemic, some institutions might not be accepting cash. Please be sure to check which stores and services accept cash and carry a card with you just in case.

To continue our budgeting series, we’d like to introduce you to the envelope budgeting system. If you get paid in cash or have the tendency to overspend, this cash-based budget might be perfect for you. A cash-based system might seem counterintuitive in this digital world, but using credit or debit cards can make it hard to know exactly how much you’re spending until the damage is already done.

The envelope budget requires a little extra effort to set up, but once you’re off, there’s not much day-to-day accounting. And as always, if this budget doesn’t fit into your life as seamlessly as you expected, we have plenty of other budget systems for you to try.

Step 1: Create Your Buckets

The first step to any successful budget? Your trusty spreadsheet. You should already have your expenses listed out and have an idea of how much you spend each month. Now, categorize them into buckets. The buckets should be specific enough that it’s clear what they’re for, but general enough that there aren’t too many categories. Here are some examples of buckets you might have:

  1. Rent / Mortgage
  2. Gas / Transportation
  3. Child Care
  4. Utilities
  5. Car Payment
  6. Insurance
  7. Groceries
  8. Savings

Step 2: Create Your Envelopes

Now, grab your box of envelopes (Yes, real, actual envelopes – any size or color will work!) and make one for each bucket. And because we totally understand that life doesn’t always fall into neat, tidy buckets, don’t forget to make an envelope for miscellaneous expenses that will inevitably pop up. Think birthday gifts and back-to-school supplies.

Step 3: Fill the Envelopes with Cash

Here’s where the math and the cold, hard cash come in. Set a total monthly budget for each bucket. Figure out how much money you need to put in each envelope from each paycheck. If you’re paid weekly, this might be $200 per week toward rent ($800 for the month) and $100 per week for groceries ($400 for the month), etc.

Then, withdraw the money or cash your check and pre-pay into each envelope for the coming month. If you go grocery shopping with just your grocery envelope, you won’t be tempted to spend “just a little more” on something you don’t actually need.

Step 4: Don’t Give Up

Spending from a stash of actual physical cash should help make it easier to see exactly where your hard-earned money is going. And of course, in order for this to really work, when the money is gone, the money is gone. Try to avoid the temptation of borrowing from your other envelopes unless it’s absolutely necessary.

If you have leftover money in any of your envelopes at the end of the month, congratulations! Consider putting that money in your savings account, or any other emergency or college funds you’re building.

And lastly, it’s not just okay to have a little fun, it’s important to have a little fun. Just make sure you plan for it, and stick to it. No matter what your budget is, set aside a little money for a special meal, movie night or family day. Learning how to live a satisfying life while on a budget can give you the encouragement you need to stick to that budget for the long haul.

Like any budget, the envelope method takes patience, time and discipline. Don’t give up. Gaining control, understanding and confidence in your financial situation will be worth it.

If you run into an emergency or unexpected expense before you can build up your savings, we’re here to help with a personal installment loan. We can work with you to make sure your monthly payments fit into your budgeting system.