How to Use the Envelope Budget System | Capital One (2024)

October 12, 2023 |6 min read

    If you’re considering creating a budget or revamping your existing one, there are a few different methods you could use.

    The envelope budget system is one way that could help you control spending and make more purposeful choices about your money.

    Key takeaways

    • Envelope budgeting is one way to manage variable expenses into categories using either physical or digital envelopes.
    • Once the money from a category is gone, you can’t spend again until you’ve added more money back.
    • Some may choose to take a digital approach to this budgeting style to avoid carrying cash.
    • Envelope budgeting can help give you a more visual perspective of your spending habits.

    What is the envelope system?

    Envelope budgeting is a budgeting system that focuses on discretionary spending—basically the money that’s left over after necessities and fixed expenses like rent are paid.

    The system uses physical or digital envelopes to separate expenses into categories. Each category is assigned a set amount of money—more on how amounts are determined below. Once the cash in each envelope is gone, you’re done spending until more money is added, which is typically at the start of a new month or pay period. The idea is to split up your money according to how much you want to spend in each category—and then only let yourself spend until the cash in each envelope is gone.

    Envelope budgeting works best for variable expenses, like groceries and dining out, which change slightly every month depending on your spending habits. These are the ideal types of expenses to include in envelope budgeting and make into spending categories.

    Here are some categories that may be included when using this type of budget:

    • Groceries
    • Entertainment
    • Dining out
    • Gas
    • Clothes
    • Personal care items
    • Managing subscriptions
    • Miscellaneous

    The envelope budget system can work well for those who like having a visual of how their money is being spent. And the good news is that this method can also be adjusted to work with online spreadsheets and other budgeting tools.

      How does the envelope budget system work?

      1. Figure out your total monthly income from sources like your job, side hustles, investments, alimony or child support payments.
      2. Evaluate your current expenses and break them down into categories. Remember, the envelope system is usually focused on variable expenses, like groceries and gas, which change slightly every month.
      3. Once you’ve chosen which variable expenses to set aside money for, write each category name on its own envelope.
      4. Pick the dollar amount you want to allot to each category and write the amount on the envelope. If you’re unsure of how much to assign to a category, you could refer to bank statements from the past few months for a better idea of how much you spent in those categories.
      5. Once you get paid or receive money, take the funds out from your bank or an ATM. Divide up the cash and put the designated dollar amount in each envelope according to what you decided and wrote on each envelope before.
      6. Once all your cash is divided up, you’re ready to use the money from each envelope as needed. To make it easier to see how much you have left, you can consider writing down what you spent—or how much is left—on the back of the envelope every time you take money out.
      7. When you’ve used all the money from an envelope, the idea is to avoid spending any more in that category until the envelope is replenished with more cash.
      8. You can dip into another envelope to cover an expense if needed. But if you’re repeatedly needing to do this, you may want to adjust your budget.
      9. Money that’s left in any envelopes at the end of the pay period or month can be saved for next month or used to build an emergency fund, save for a trip or pay off debt.

        Pros of using cash envelopes to budget

        • If you stick to the plan, it can be harder to overspend with this method since you’re only allowed to use the cash on hand.
        • Having a visual of your funds and how much you planned to spend in each category can help you stick to your budget.
        • Leftover cash can go toward savings or other financial goals.

        Cons of using cash envelopes to budget

        • It requires carrying cash.
        • Some people would rather use a credit or debit card to make purchases, in which case a digital system might be a better fit.
        • Separating expenses and dividing money can be tedious.

        Using the envelope budget system with mobile banking

        If you like the concept of envelope budgeting—but not necessarily the idea of using physical cash—you can modify this approach to a digital-based system. This can help avoid an ATM trip and alleviate some of the worry about carrying cash.

        One of the ways to use a digital approach is to use an app. Or you can create a spreadsheet yourself to keep track. You could make columns to serve as virtual envelopes that represent your monthly spending categories. And each time you make a purchase, adjust the amount in the column to reflect the new total. Then reset the columns when a new month begins.

        Alternatives to the envelope budget system

        The envelope budget system may not work for everyone. Here are some other ways to manage your money.

        50/30/20 strategy

        The 50/30/20 approach to budgeting groups expenses into three budget categories—needs, savings and wants. This method recommends setting 50% of your budget toward needs, 30% toward savings and 20% toward wants.

        Zero-based budgeting

        With the zero-based budgeting approach, you decide how you want to use every dollar of income. This means subtracting all your expenditures from your earned income. And any money that’s left over should be put toward a planned expense—like saving money, paying off credit card debt or investing—until you reach a $0 balance. In some cases, a credit card balance transfer may also be considered.

        Pay-yourself-first approach

        This type of reverse budgeting works by ensuring all your monthly obligations and savings goals are funded first—without taking on more debt. And then whatever is left over can be spent however you see fit.

        Envelope budgeting in a nutshell

        The envelope budget system can help you build better financial habits and make intentional choices about how you spend your money. If using physical cash isn’t the best option, a digital approach or a different type of budget might be better.

        Of course, envelope budgeting isn’t the only way to work on your financial health. You can also learn some other money management tips to help you improve your finances.

        Khan Academy Financial Literacy course

        Find practical tips and step-by-step guidance in this free online course to help you budget and save like a pro.

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        How to Use the Envelope Budget System | Capital One (2024)


        How to Use the Envelope Budget System | Capital One? ›

        Evaluate your current expenses and break them down into categories. Remember, the envelope system is usually focused on variable expenses, like groceries and gas, which change slightly every month. Once you've chosen which variable expenses to set aside money for, write each category name on its own envelope.

        How to use the envelope budget system? ›

        You just take the exact amount of cash you've budgeted for each category and stick it in individual envelopes. Then throughout the month, you check your envelopes to see what's left to spend—because you'll see the literal amount in cash. Right there. How easy is that?

        How do you use the envelope budget system without cash? ›

        How to Hack the Cash Envelope System to Forgo Using Cash
        1. Use Gift Cards. Instead of stuffing your spending envelopes with cash, use gift cards. ...
        2. Use a Budgeting App Based On the Envelope System. ...
        3. Use Multiple Accounts for Different Types of Spending. ...
        4. Track Your Spending After Every Transaction.

        How to do the envelope money saving? ›

        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. After you've filled up all the envelopes, you'll have a total savings of $5,050.

        Should I use the cash envelope system? ›

        The envelope budgeting system can be a good fit for people who want to track their spending and need help staying within their monthly allowance. Here are some other upsides: It may help you spend less. People tend to spend less when using cash.

        What is one potential downside of using a cash envelope budget? ›

        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? ›

        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.

        What is the envelope budget system for beginners? ›

        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.

        What is the 50/30/20 rule? ›

        Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

        What is the envelope budget hack? ›

        The 100-envelope challenge is a way to gamify saving money. 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.

        How can I save $5000 in 6 months with envelopes? ›

        It's a simple, low-tech way to gamify your savings. You label 100 envelopes 1 to 100, and over 100 days (or more), whatever number is on the envelope you select, you stash that amount of cash in there. The math works out to $5,050 when you're done! (1 + 2 + 3 + 4 . . . you can double-check us if you want.

        How much to save $5000 in 6 months? ›

        Cut Unnecessary Expenses From Your Budget

        “Divide $5,000 by six months and that equals $833/month that must be removed from the budget or earned in extra income. The solution lies with the person — they must know themselves to know what will work for them and typically one solution or the other will be more appealing.

        How to save $5000 in 3 months? ›

        How to Save $5000 in 3 Months [2024]
        1. Create a Budget and Plan.
        2. Pick up a Side Hustle.
        3. Sell Things Around Your Home.
        4. Refinance Debts.
        5. Cut Unnecessary Expenses.
        6. Reduce Living Expenses.
        7. Try an Envelope Savings Challenge.
        8. Use Cash Back Apps.
        May 3, 2024

        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.

        What app uses the envelope system? ›

        RealBudget is designed to bring you the simplest form of money management in the most straightforward way possible. Create monthly budget envelopes, enter transactions, and track how you spend your money each month.

        What are the cons of cash stuffing? ›

        Cash stuffing might appeal to consumers who prefer simplicity or have problems with impulse control. But the risk of having all that cash around — not to mention missing out on interest and card rewards — should make you think twice before labeling all those envelopes.

        How does the 100 envelope challenge work? ›

        Pick 1 envelope each day The number on the envelope you choose is the amount of cash you should stick inside of it. For instance, you'd put $3 inside envelope #3 and $98 inside envelope #98. After you put the proper amount of money in the envelope, seal it up and place it somewhere safe.

        Which budget app uses the envelope system? ›

        Use Goodbudget.

        Save for big expenses, share household expenses, and budget on the go. Goodbudget makes it easy to live out a budget based on the envelope budgeting system.


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