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How to Start Budgeting with the Simple Envelope System

Cash Coming Out of Envelope

Personal budgets can sometimes feel restrictive, but budgeting is one of the most important steps towards financial freedom. When done right, budgeting gives you control over your money so you can allocate it towards what matters most to you. One budgeting method that provides a tangible way to visualize your spending is called envelope budgeting.



Envelope budgeting, also known as the envelope system, is a budgeting method that distributes your income among different physical or digital envelopes designated for specific spending categories like groceries, dining out, entertainment, clothing, utilities, and more. By separating your money into these labeled envelopes, you can clearly see how much remains for each type of expense throughout the month. Envelope budgeting brings your budget to life in a concrete, visual way that sets defined limits on your spending and promotes mindful purchasing decisions.

  1. Identify your fixed and variable expenses, assigning amounts to allocate to envelopes. Start with essentials, then add envelopes for savings goals, discretionary categories, etc.
  2. Withdraw your total monthly budget amount in cash from the bank, or setup your digital envelopes in an app such as You Need a Budget. Apps allow convenient tools like setting up automatic recurring monthly deposits.
  3. Organize the cash into clearly labeled envelopes for each spending category. Color coding envelopes can help. Or create digital envelopes organized by category.
  4. Keep your cash envelopes in a central family location or in your wallet. Carry digital envelopes in your phone.
  5. Only spend directly from the designated envelopes. If the envelope is empty or funds are exhausted in a digital envelope, you must pause spending in that category.
  6. Track spending from physical envelopes in a notebook. Digital apps automatically log envelope spending.
  7. At month-end, tally up envelope spending amounts and adjust your category allocations as needed for the next month.
  8. Roll any unspent cash into the next month’s envelopes to get a head start. Leftover digital amounts automatically roll over.
  9. Start fresh each month by withdrawing and stuffing new cash into envelopes or having your monthly digital allocations populate.



Compared to tracking all your expenses solely in a notebook or spreadsheet, envelope budgeting provides many unique psychological and tangible benefits:


Visual tracking. With cash-filled envelopes or digital envelopes, you can see clear visuals representing the precise amount remaining for different expenses like gas, groceries, eating out, etc. This visual cue strengthens your spending awareness.

Conscious spending. Physically taking money from an envelope or digitally transferring funds makes you more mindful about each purchase decision rather than mindlessly swiping a credit card.

Curb overspending. If you’re sticking to the envelope system closely, you simply cannot spend more than what is in the envelopes, helping significantly curb impulse purchases and overspending tendencies.

Flexibility. You can easily move money between envelopes as needed either physically or digitally through an app. This allows you to adapt to changing spending needs each month. For example, if you realize that you don’t plan to eat out as much this month, you could take money from that envelope and put it towards something else.

Avoid debt traps. Relying solely on cash or digital envelopes reduces the risk of accumulating credit card debt spend more than you have allocated. If you decide to spend with a credit card to take advantage of perks, you simply move money from the envelope associated with the purchase, such as dining out, to the credit card payment envelope that is associated with the card you used.

Teachable moments. Involving family members like children in organizing the envelopes provides impactful hands-on learning experiences about smart money management.



Follow these tips and tricks to ensure smoother sailing with your envelope budgeting journey:

  • Start simple. Resist creating too many envelopes when first getting started. Slowly add more cash envelopes or digital categories over time as needed.
  • Build in room for flexibility. Have a small contingency envelope or digital category for unexpected expenses. This provides a buffer, so surprises don’t derail your carefully planned spending.
  • Use envelopes for irregular expenses that are not recurring monthly bills. Examples include medical co-pays, car repairs, association dues, clothing purchases, etc.
  • Use envelopes for flexible spending categories prone to impulse spending like dining out, entertainment, hobbies, allowance, etc. where sticking to a defined spending limit is important.
  • Have use envelopes for their personal discretionary spending to learn smart money management habits. This is especially useful if they receive an allowance from you.
  • Save time by tracking envelope spending at a high level rather than logging every single receipt. But reconcile receipts occasionally to verify cash balances match your tracking.
  • Make envelope budgeting a family activity. Include children and your significant other when organizing your family budget envelopes and review them regularly as the money disappears each month.



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While envelope budgeting promotes very mindful intentional spending, it does come with a few drawbacks to consider:


Requires discipline. Making envelope budgeting work depends entirely on diligently following the cash-only spending rule. It takes self-control and discipline not to cheat and use your debit card or credit card when an envelope runs empty.

Security concerns. Keeping significant amounts of cash at home creates risks of theft or accidental loss. This is why many choose to track their envelopes virtually using personal finance applications.

Limited recordkeeping. Physical cash envelope tracking is typically limited to writing amounts in a notebook rather than using more sophisticated financial tracking software. If you enjoy detailed expense analysis, this simplistic method may leave you wanting more.

Inflexible amounts. Once cash is allocated into envelopes, it can feel restrictive compared to a more fluid digital budget. Carefully moving money between envelopes provides some relief when needed.

Bank withdrawal limits. Most banks limit how much cash you can withdraw each month, so very large monthly budgets may be inconvenient to implement with physical cash envelopes.

Coin buildup. Over time, you may end up accumulating a lot of coins in your envelopes that will need to be exchanged for cash at the bank which can be time consuming.



The best of both worlds may be implementing a hybrid approach that thoughtfully incorporates elements of physical cash envelopes and digital envelope budgeting apps.

Apps like You Need A Budget (YNAB), Goodbudget, and EveryDollar provide digital envelopes to categorize your money without dealing with actual cash. This allows conveniences like automatic tracking, mobile access, digital-only bank transfers between envelopes, and instant spending feedback.

But for some expenses like groceries, gas, and family activities, physical cash envelopes have a tangible psychological benefit when spending. For goals like an emergency fund or a new appliance, the growing stack of cash can provide huge motivation.


Consider which elements would appeal to your lifestyle and financial habits. Experiment to find the right balance of digital convenience and the hands-on cash motivation. Take back control of your hard-earned money. Let envelopes guide your spending to align with your values, instill financial awareness, and help you achieve financial freedom.

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About Oliver Ames

Oliver is VSECU's social media strategist and spends most of his day engaging with members through our Facebook, LinkedIn, Twitter, and Instagram profiles. He has a background in science education, non-profit fundraising, business communication, media production, and membership-based organizations. When not at work, Oliver spends much of his time with his wife and son at their home in Montpelier.
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