What is envelope budgeting, and is it right for you?

Envelope budgeting categorizes monthly expenses into envelopes to help those who struggle to stick to their budgets. Find out if this strategy is right for you.

Anyone who has tried to make a budget knows it can be hard to get started — and even harder to stick to it.

If you’re having trouble sticking to your monthly budget or are just looking for ways to make budgeting easier and more effective, then envelope budgeting is worth considering. As you might guess, it involves using envelopes to keep track of the money you’re bringing in, and how you’re spending it.

Keep reading to find out if envelope budgeting is a good fit for you.

What is envelope budgeting?

Envelope budgeting is a way of categorizing your monthly spending and assigning a certain amount to each category.

Each time you get paid, you put a set amount of cash into each envelope, according to your budget and monthly income. You then use the money from each envelope for their designated expenses. Once the envelopes are empty, you’re done spending in that category for the month. (You can also use a digital version of this system if paper envelopes aren’t your thing.)

For example, if you’ve allocated $750 a month in your budget for groceries, you would put $750 in cash in an envelope strictly meant for groceries. Then you’d repeat this process for every category in your budget until all of your money is neatly organized into different envelopes with distinct purposes.

Some of the most common budget categories to include in your envelope budget are:

• Housing (rent or mortgage)
• Utility bills
• Groceries
• Gas and transportation
• Personal care
• Entertainment
• Dining out and food delivery
• Clothing
• Child care costs
• Pet care costs
• Student loan payments
• Miscellaneous
• Savings goals

The key part of envelope budgeting is ensuring you only use the money in a certain category for its intended purpose. So if you’ve earmarked $300 a month for dining out, you can only use the $300 you put in the “dining out” envelope at the beginning of the month to pay for your restaurant meals. If you run out of the $300 halfway through the month, you’ll have to tough it out and cook the rest of your meals at home.

So what happens if you get to the end of the month and still have some money left over in some of your envelopes? Surely it must roll over to the next month, so you have a little extra spending money to reward your good behavior, right? Not quite.

Any leftover money should be rolled into your savings account, used to pay off any debt not covered by your additional budget, or put toward building an emergency fund. While this can require a lot of self-restraint, it can also be a great way of saving money and reducing debt.

Using an envelope budgeting app

As implied by the name, envelope budgeting traditionally involves stuffing envelopes with cash based on pre-set categories. However, there are now a number of budgeting apps that will allow you to link your checking account and divide your money into different digital envelopes. That way, you’ll be able to use your debit card to make online and in-person purchases while following the principles of envelope budgeting.

Some budgeting apps that support the envelope budgeting system are Goodbudget and RealBudget.

If you choose the digital envelope system, be aware that you lose some benefits of physically sorting and budgeting your cash, namely the physical barrier-to-entry for misusing your funds. (In other words, you’re more likely to think twice about shifting money from the envelope for “student loan payments” to “dining out” if the money is in an actual, tangible, physical envelope than a digital one.)

What are the pros and cons?

Here’s what can help you decide if this is the right strategy for you.

Pros

• Organizing your money by category can help you stick to your budget. Unlike using a credit card, putting your cash into different envelopes can ensure you don’t spend more money than you’ve allocated to a specific category. Once your monthly budget is exhausted — that’s it. No more replenishing the envelope or borrowing from another envelope halfway through the month.
• Analyzing your budget categories helps you better understand your monthly spending habits, as you see which envelopes were quickly depleted and which categories had money left over at the end of the month. At first, you might not be able to accurately predict your monthly expenses, but over time, you likely will be.
• Limiting money to specific categories can prevent unnecessary purchases.

Cons

• Little to no flexibility. An emergency or unexpected event could throw a wrench in your budgeting plans.
• Online payments present a challenge. If you are strict about your adherence to the envelope method, you’ll forgo the convenience of online payments (including automatic withdrawals for things like your electric bill). But if you’re not strict about it, you might wind up choosing convenience over meeting your financial goals.
• Cash can be inconvenient, especially since the pandemic ushered in a host of cashless venues. Relying on cash for your everyday expenses involves going to the bank or ATM to withdraw the money, bringing it with you wherever you go, receiving change for your purchases in small bills and coins, and more challenges you wouldn’t have to deal with when paying by card.

Who should consider it?

Envelope budgeting can be a great idea for people who have trouble making and sticking to a budget. It can also be useful for younger people, including teenagers and younger children, who are still learning the basic principles of money management.

For many people, the convenience of digital payments makes traditional envelope budgeting a nonstarter. Again, there are digital apps that make it easier, working with your bank account to make online payments, but those might not be as useful as a more all-encompassing budgeting app.

It’s worth noting that those with less consistent sources of income, such as gig workers and freelancers, might struggle with envelope budgeting as well.

One more thing…

Ultimately, the budget you can stick to is the one you should use. You may find that just the process of setting up budget categories reveals patterns and additional expenses you hadn’t noticed. It’s worth the time to find out where your hard-earned money goes.

And if life insurance is one of your envelope categories (hint: it totally should be), learn more about Haven Life’s affordable term life insurance options to help you stay on budget, and help keep your family financially protected in case the worst should happen to you.