Is the Envelope System the Best Budgeting Method? (2024)

Is the Envelope System the Best Budgeting Method? (1)

Finding the right budgeting system can take the hassle out of managing your money. The envelope system is a popular option for creating a household budget and it's the one advocated by personal finance experts like Dave Ramsey. But how does the envelope system work and is it the right choice for you? If you're looking for a new approach to budgeting, here's what you need to know.

What Is the Envelope System?

In a nutshell, the envelope system is what it sounds like—dividing up your monthly or weekly funding budget into various paper envelopes.

Each envelope is assigned to a specific category, and is designed to manage discretionary expenses. Discretionary expenses, also called variable expenses, are amounts you spend every week or month but might change from month to month.

How to Set Up an Envelope System Budget

Learning how to budget using envelopes isn't that difficult, even if you've never budgeted before. It's very similar to making any other kind of budget, with a twist. Here's a checklist for getting started:

1. Establish Budget Categories to Assign Each Envelope

The first step in using an envelope system is deciding which expenses to include in your envelopes. This part of the process is personal—you're tailoring each envelope to your specific budget and spending.

Your envelope labels might include general categories such as groceries, gas, clothing, entertainment, and savings, for example.

2. Allocate Dollar Amounts to Each Envelope

Once you have envelopes for the expenses you want to manage, decide how much money goes into each. This should be easy to do if you've already added up your income for the month, then subtracted the amounts you need to set aside for your fixed expenses. If you haven't done that yet, hit pause and tackle that task.

If you’re paid weekly or biweekly, you may need to look at budgeting on a weekly level.

So let's look at the list of example envelopes from earlier. Assume that you have $1,000 total to fill up those envelopes for the month. Your allocation might look like this:

Personal Care$50

The sum total of the envelopes should reflect the sum total of cash you have to assign.

On the front of the envelope, write down the starting amount you have to spend for that budget category.

3. Withdraw Cash to Fill Your Envelopes

At this step, you withdraw the cash you need to fill your envelopes. Ideally, you add the cash you need to each envelope at the beginning of the month. Then for the rest of the month you take money out of the relevant envelope when you need to make a purchase in that category.

If you're planning to withdraw cash for your envelopes from an ATM, check your bank's maximum daily withdrawal limits first. You may need to visit a branch instead to get the total amount of cash you need. If you don’t have enough money in your account for the month, set up a weekly envelope system.


Keeping large amounts of cash in envelopes at home can present the risk of theft or loss; store envelopes in a safe place. As well, never pay bills by sending cash through the mail.

4. Track Your Spending for Each Envelope

If you've divvied up the cash in your envelopes you're ready to start spending money for the month.

To make the system work, keep a running total of how much money you have to spend for each category. Each time you withdraw money, subtract it from the amount to get a running total of cash remaining. Take the envelope with you when shopping, or if you don't have time to jot down how much money you've pulled out of your envelope before making a purchase, store the receipt and come back to it later.

Using the Envelope System With Credit or Debit Cards

The envelope system may be harder to use if you’re paying all of your expenses with a debit card, or use a credit card that you try to pay off monthly. If you primarily use credit or debit cards, there are web and phone apps that rely on a virtual envelope method, such as Mvelopes.

Or you can create your own system in the following manner:

  1. Establish budget categories and assign an envelope to each category. Write on each how much you intend to spend for the month.
  2. Always request or accept receipts when using your card, and add receipts to the envelope at home. Write each receipt amount on the correct envelope’s exterior to keep a running total of expenses.
  3. Don’t spend more than the amount you’ve assigned.


Avoid the temptation to spend on credit. If an envelope runs out of money in a particular category, it may be easy—and tempting—to keep spending using credit. But that can lead to debt, which can blow your whole budget out of the water. So stick with just spending what you already have, whenever possible.

The Bottom Line

The envelope system isn't hard to master, but only spend what's in each envelope. Once the money in a specific envelope is gone, it's gone for the month. You can't spend more in that category until the next month starts or dip into other envelopes. The purpose of using envelopes to budget is to stay in control of what you're spending. If you’re spending more than you have, change your spending patterns or your budget.

Remember that you don't have to spend each envelope down to $0 each month. Cash left over means you spent less than you planned. Pay down debt, or add leftover cash to your emergency fund. Giving any extra dollars a purpose is key to ensuring the money doesn't go to waste.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

  1. North Dakota State University Extension. "Use the Power of Envelopes to Take Charge of Your Spending."

  2. Consumer Financial Protection Bureau. "Budgeting: How to Create a Budget and Stick with It."

  3. North Dakota State University. "Using Envelopes to Track Expenses."

Is the Envelope System the Best Budgeting Method? (2024)


Is the Envelope System the Best Budgeting Method? ›

Here's the thing with the envelope budgeting system: It works better when you have to physically walk into a store to make a purchase. Shopping at the grocery store, going out to eat, getting a haircut or oil change—these are all times when cash stuffing is really helpful.

Is envelope budgeting a good method? ›

And if you regularly overspend, you might not reach those financial goals you've set. The envelope budgeting system is one way to track your money each month, and it may help you curb overspending because it limits what you have available.

What is the downside of the envelope system? ›

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.

Does Dave Ramsey use the envelope system? ›

It really was made famous (and a lot more popular) by finance guru and radio talk show host Dave Ramsey. All you need to get started are some ordinary envelopes, either store bought or homemade. Oh, you also need to mix in some financial discipline. You'll definitely need that.

What is the advantage of the envelope method? ›

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.

Which budgeting approach is best? ›

5 budgeting methods to consider
Budgeting methodBest for…
1. The zero-based budgetTracking consistent income and expenses
2. The pay-yourself-first budgetPrioritizing savings and debt repayment
3. The envelope system budgetMaking your spending more disciplined
4. The 50/30/20 budgetCategorizing “needs” over “wants”
1 more row
Sep 22, 2023

What are the downsides of envelope budgeting? ›

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.

How much money do you save with the envelope system? ›

After completing the 100 envelope challenge, you'll have saved $5,050. Each envelope will have a certain amount of cash, from 1 to 100. When you add all the envelopes together — $100 + $99 + 98 + $97, and so on, all the way down to $1 — the total amount comes out to $5,050.

Why do building envelope systems fail? ›

Building envelopes can fail when materials don't achieve the published performance levels, often as a result of errors in the manufacturing, storing, or handling of the materials or components within the product. Contractors must inspect all building products before using to prevent envelope failure.

What is the 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What is the envelope budget trick? ›

To begin, a good rule to follow is the 50/30/20 method: 50% of funds go to needs, 30% wants and 20% to financial goals. Make an envelope for each category that applies: rent, utilities, phone bill, gas, groceries, emergency, savings and leisure. Put aside cash in each envelope corresponding to the amount used.

Does the envelope system work? ›

Every little bit helps! 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.

What is your biggest wealth building tool? ›

“Your most powerful wealth-building tool is your income. And when you spend your whole life sending loan payments to banks and credit card companies, you end up with less money to save and invest for your future.

What are two reasons that a cash envelope system can be an effective way to budget for your wants? ›

You could see exactly what you spend

The cash envelope system is visual, making it simple to see just how much you're spending on various categories throughout each month. It could also help you understand what changes you might want to make to meet your saving goals.

What is the envelope strategy? ›

At its core, the envelope strategy involves dividing finances into distinct categories, each earmarked for specific expenses or financial goals. ‍The beauty of the envelope strategy lies in its simplicity.

What are examples of the envelope method? ›

Envelope Saving Method Example

So here's a simple example of how the envelope saving method works. Say that you have $5,000 per month in take-home pay. Of that amount, $3,000 goes toward fixed expenses and debt repayment, while $500 goes to savings. That leaves you with $1,500 to cover your variable expenses.

How to save $5000 in 3 months with 100 envelopes? ›

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.

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