How to Budget Using The Envelope System - NerdWallet (2024)
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Key takeaways:
With the envelope system, you allocate your take-home pay toward specific categories by placing cash in labeled envelopes.
On TikTok, it's known as "cash stuffing."
You can apply a digital approach to the envelope system with the help of apps and spreadsheets.
This system allows you to closely track all of your money; a downside is that it takes a significant amount of effort.
What is ‘cash stuffing’?
The envelope system — also known on TikTok as "cash stuffing" — is a budgeting method that allows you to physically portion out your monthly income into different spending categories.
This money management system has been around for years, but cash stuffing or the envelope budgeting method has taken on new life from high-profile exposure on TikTok.
The concept is simple: Take a few envelopes, write a specific expense category on each one — like groceries, rent or student loans — and then put the money you plan to spend on those things into the envelopes.
Traditionally, people have used the envelope system on a monthly basis, using actual cash and envelopes. More recently, people have adopted digital methods, including spreadsheets and apps like Goodbudget and Mvelopes.
Before you build a budget
NerdWallet breaks down your spending and shows you ways to save.
Cash stuffing doesn’t have to be complicated, but it does require some organization and planning on your part. The three steps below outline how you can begin your budgeting journey, if this is the right method for you.
1. Start with a budget
A solid budget can make the cash stuffing method smoother by ensuring you have enough money to cover your expenses. Consider using the 50/30/20 budget, where you put 50% of your after-tax income toward needs like rent and groceries, roughly 30% toward wants like travel and eating out, and at least 20% toward savings and debt repayment.
Say you take home $3,500 a month. This is what your budget might look like:
$1,750 in your needs envelopes.
$1,050 in your wants envelopes.
$700 in your envelopes for savings and debt repayment.
Keep in mind that this is just one budgeting strategy and you can divvy up your money as you see fit.
2. Create your envelope categories
Think about the types of expenses you have and sort them into categories. You get to decide how broad or specific to be here. You can have a general “going out” envelope, for example, or you can have a “movies” envelope, a “restaurants” envelope and a “drinks” envelope.
Next, label an envelope for each category and fill it with the amount of cash you’ve allotted for that expense. That's the "cash stuffing" part of the process.
When you pay for something, use money only from the corresponding envelope. For example, if you set aside $50 in an envelope marked “coffee,” and you buy a $5 latte at Starbucks, you’ll take the money from the envelope. That leaves you with $45 left to spend on coffee for the month.
You can refill your envelopes once a month or after you get your paycheck.
The pros
The cash stuffing envelope system also helps avoid the overdraft fees and debt that can come with frequent debit and credit card swiping. Physically dividing up your money also makes you aware of exactly how much you have available to spend on a given item, which helps curb overspending on impulse purchases.
“What either makes or breaks a budget is the variable expenses. It’s the going out with friends here and there. ... It’s all these little things that add up,” says Carlos Moreno, a financial specialist and coordinator of the Mobility Mentoring Center at Economic Mobility Pathways, a Boston nonprofit that serves low-income families. “That’s where the envelope system is so effective. It shows you right then and there how much money is going into specific categories.”
Cash-only users are more likely to feel an emotional connection to their money, too. Because cash is visible, touchable and instantly parts with you, it’s easier to be aware of how much you’re spending — and you’re likely to spend less than you would with a credit card, according to several studies.
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The cons
Making regular trips to the bank or ATM to withdraw money can be time-consuming and leave you vulnerable. Carrying large sums of cash puts you at risk of loss or theft. You’ll also miss out on the protection and rewards that credit cards can offer.
Protect your savings allotment by putting it into a savings account, preferably one that pays a good interest rate, rather than keeping it in an envelope where it could be easily lost or stolen.
» MORE: How to choose the right budget system
Who benefits from the cash stuffing envelope system
The envelope system can help new budgeters and impulsive spenders. It lets you set goals and gauge how much you spend and save. We recommend this method to people who want to take charge of their finances in a hands-on way.
Want a free budget worksheet?
Use the Nerds’ 50/30/20 budget worksheet to see how your budget stacks up, and spot opportunities to save money.
The concept is simple: Take a few envelopes, write a specific expense category on each one — like groceries, rent or student loans — and then put the money you plan to spend on those things into the envelopes. Traditionally, people have used the envelope system on a monthly basis, using actual cash and envelopes.
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
When you're out of cash in the envelope, that's it. You can't overspend. Plus, you avoid the overdraft and fee penalties associated with careless card swiping. Cons: Carrying cash is not a practical system for some consumers.
The 100-envelope challenge is pretty straightforward: You take 100 envelopes, number each of them and then save the corresponding dollar amount in each envelope. For instance, you put $1 in “Envelope 1,” $2 in “Envelope 2,” and so on. By the end of 100 days, you'll have saved $5,050.
In this technique, the idea is to break down your monthly living expenses, savings, and debt repayments into categories and set aside the appropriate amount for each bucket — one envelope for the rent, another for the car payment, one for each credit card payment, one for savings goals, etc.
The envelope budgeting method is a budgeting system that was popularized by personal finance author Dave Ramsey. The method involves dividing your take-home pay into spending categories (e.g., rent, utilities, et cetera), labeling an envelope for each category, and putting the cash you plan to spend into the envelopes.
Bottom Line. Living on $1,000 per month is a challenge. From the high costs of housing, transportation and food, plus trying to keep your bills to a minimum, it would be difficult for anyone living alone to make this work. But with some creativity, roommates and strategy, you might be able to pull it off.
For many people, the 50/30/20 rule works extremely well—it provides significant room in your budget for discretionary spending while setting aside income to pay down debt and save. But the exact breakdown between “needs,” “wants” and savings may not be ideal for everyone.
The 50/30/20 has worked for some people — especially in past years when the cost of living was lower — but it's especially unfeasible for low-income Americans and people who live in expensive cities like San Francisco or New York. There, it's next to impossible to find a rent or mortgage at half your take-home salary.
Cash envelopes are powerful weapons in the fight against overspending. They can help you manage your money better than you ever have—and help you reach your money goals faster. Put the cash envelope system to work and get intentional about how you're spending your money.
Requires physical money – Because this system is all cash, you'll be less reliant (if at all) on credit cards. This could be inconvenient and may even cause you to lose out on some of the benefits of using credit cards, like a more active credit history and rewards points.
You may also feel unsafe carrying cash, as it's harder to track it when it's lost or stolen. It can be cumbersome to get started: Getting all the envelopes ready and allocating money into categories can take some time to set it all up, especially if you haven't created a budget before.
You can save over $5,000 in just over three months with the 100 envelope challenge. It works like this: Gather 100 envelopes and number them from 1 to 100. Each day, fill up one envelope with the amount of cash corresponding to the number on the envelope. You can fill up the envelopes in order or pick them at random.
On each envelope, write the day number and the amount you need to save for that day. For instance, on the first envelope, you would write "Day 1: $1" and on the second envelope "Day 2: $2", and so on all the way to Day 100: $100. Each day, you take the envelope for that day and put the designated amount of cash inside.
Each day for 100 days, you'll set aside a predetermined dollar amount in different envelopes. After just over 3 months, you could have more than $5,000 saved.
You may also feel unsafe carrying cash, as it's harder to track it when it's lost or stolen. It can be cumbersome to get started: Getting all the envelopes ready and allocating money into categories can take some time to set it all up, especially if you haven't created a budget before.
With the Free version of Goodbudget, you'll be able to track up to 10 More Envelopes for savings or goals. Get the paid Premium version to track unlimited savings or goal Envelopes.
If you have less than 5, then you may not be including all of your “problem” categories/expenses in your system. However, there are certainly people out there that only need a couple cash envelopes, it's just not the majority of budgeters. If you are just starting out, I suggest starting with five cash envelopes.
Introduction: My name is Jonah Leffler, I am a determined, faithful, outstanding, inexpensive, cheerful, determined, smiling person who loves writing and wants to share my knowledge and understanding with you.
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