Is the Envelope System of Budgeting Really a Wise Move?

Updated on November 10th, 2021

Ever hear of the envelope system? Toted as a way to jump start your debt repayment by forcing you to stick to your budget, the envelope system is a simple concept.

Once your budget is established, take a look at the categories into which you have placed your money. On paper, it might seem easy to stick to those numbers and stay in budget. Words can be fickle, though, and the human mind reacts to printed numbers similar to the way it reacts to swiping your credit card for purchases: it can feel intangible and shallow.

Staring at the numbers shown on your computer does not give you the same tangible connection that holding cold, hard cash does. Studies have shown that people are less likely to spend unnecessary money if they use physical currency instead of credit cards or mobile pay.

The Envelope System

The envelope system is supposed to be the solution to this problem. It keeps you from wasting money – no matter the category.

Once the month (or pay period, if you refill your envelopes biweekly) begins, look at your categories in your budget. Food, clothes, gas for the car… I’m sure you have a few more. For each and every category, the envelope system dictates that you pull out an envelope of your choosing (decorated ones look pretty, but longer security envelopes work just fine) and write one category name on each envelope. Then, you are to take cash – real, honest-to-goodness, fresh from the ATM cash – and divide it up into your envelopes based on your budget.

The Theory behind it

The theory is, if you only have $200 in your food budget for the month, you will only use that $200. Not a penny more. The truth is, this takes major dedication. Even if you only buy the essentials you need to last through the month, you can still run the risk of going over budget if you aren’t careful. This requires calculating how much you are spending while you are in the store, making sure you have enough to cover the trip in cash in your pocket or purse, and making the decision of what needs to go when you find out you’re over budget for the day (or month).

You can always move money from one envelope to another, such as from your “gas” envelope to the “food” envelope. Before you do this, make sure that you really are okay with spending less in the category you took the money from. You don’t want to take the money you need from “gas” to cover the extra food at the grocery store, only to realize next week that you have no more money for gas and your tank is on empty.

Speaking of running out of money, make sure to check with your bank before utilizing the envelope system. If you are pulling the great majority of your account out each month to fill the envelopes, you may go under any minimum balances the bank requires you to hold. Account minimums are rare but they do exist in situations where you’re trying to get a new account bonus.

Other considerations

The other consideration to make before choosing the envelope system is safety. Do you really feel safe carrying around an envelope (or several, depending on how many errands you want to run) with a wad of cash inside? Inside a purse, maybe it can be hidden well, but guys, your pockets aren’t that big. The envelope can be bulky and add weight to your purse or pants, making it obvious you have more in there than Chapstick and your license. You especially want to feel safe when you carry cash and travel far from home – for business or personal trips.

In theory, the envelope system is a great way to really force you to stick to your budget. In practice, there is a little more to it than stuffing an envelope with cash and going on your merry way to the store. As always with personal finance, what works great for a friend may not work well for you; you have to take into consideration all of the factors, and decide for yourself how to make your money work for you (and not the other way around).

William Lipovsky

William Lipovsky

William Lipovsky owns the personal finance website First Quarter Finance. He began investing when he was 10 years old. His financial works have been published on Business Insider, Entrepreneur, Forbes, U.S. News & World Report, Yahoo Finance, and many others.

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