Money Envelope System for Effective Budgeting

Updated on November 10, 2015
Money Envelope System for Effective Budgeting
Money Envelope System for Effective Budgeting | Source

In this age of paying bills electronically and using a debit or credit card for just about every purchase, it's easy to run up the bills quickly. By the time the end of the month rolls around it seems like there is no money left to pay that last bill and it ends up going on the credit card.

An easy and fairly painless way to help solve this budgeting problem is by setting up a cash envelope system. It seems like it would be hard to go to an all cash budget, but with a little discipline anyone can do it. You'll be amazed at how easy it becomes to pay the bills and save a little money.

There are commercial systems that are available, but before you go out and spend money on one, try this method first.

Why I decided to use the money envelope system to budget

When I graduated from college I got a job and moved to New York City. I earned a small salary and lived in a tiny basement apartment while barely scraping by. I quickly realized that money went out the door a lot faster once I had to pay my own rent and other expenses. After about 4 months of a dwindling bank account and a rising credit card balance, I vowed to do something about it.

I decided to go to an all cash budget using a money envelope system. My reasoning was that if I did not have the cash on hand, then I could not spend it. I took my credit card out of my wallet and stashed it away, keeping it only in case of an emergency.

The next few months were pretty tough and I declined a lot of invitations to go out, but I noticed that at the end of every month I had paid all of my bills on time, and I was starting to build up my savings again. This envelope budgeting system worked well for me and I used it the rest of the time I lived in New York.

How to use the money envelope system

Once you have decided to try this method, it's easy to get started.

  1. Determine your family's monthly income and expenses and write them down. Start with your fixed expenses like rent and car loans. For expenses like electric, take a look at past bills and do an average. Your income minus your expenses should equal zero once you've calculated all of the numbers. To get your budget to balance, you will probably discover that you'll have to decrease some of the variable expenses.
  2. Assuming you get paid on a bi-weekly basis (every 2 weeks) divide the expenses in half. This is the amount of cash that you will put in your envelope every time you get paid. For example, if your car loan is $250 a month, $125 from every paycheck goes into the car loan envelope.
  3. Since bills are not all paid at the same time over the course of one month, it may take a couple of months to get going. Once caught up, everything should work out.
  4. Every household is different and it will take some time to review your income and expenses and come up with a workable budget. The table that follows represents a basic sample budget which can be adjusted to meet everyone's needs.

Basic Sample Budget

Bi-Weekly Amount (to put in envelope when paycheck arrives)
Monthly Amount
Car Loan
Credit Card
Dance Lessons
Total Expenses
Balance (Paycheck minus total expenses)
This is only a basic sample budget. Sit down with your family and work on your budget together. If the funds are available, it is also wise to budget for things that will occur in the future like vacation or new tires.

Some important tips when using the money envelope system for budgeting

  • Discipline is the key - If you don't have the cash, don't buy the item. Don't take money from one envelope and put it in another.
  • Make hard decisions - If your budget is not balancing, you'll need to make hard decisions. Skip the fancy coffee shop drink or skip the weekly night out once in a while.
  • Save leftover funds in the envelopes - There will be times when you'll have some money left over once you have paid the bill. Roll it over to the next month or tuck it away in savings. Another idea is to have an envelope for the extra funds so that if you ever find yourself short on a bill you can take it from this envelope.
  • Involve the entire family - Let your family know what you are planning on doing. Get them involved in the budgeting process. It will help everyone adjust to the change more easily.
  • Keep a credit card - While the goal of this system is to save money and help your family adhere to a budget, there are times when emergencies arise. Keep a credit card tucked away somewhere in your house for these situations.
  • You don't have to use envelopes - Get creative and use cans or jars. There is a popular financial television presenter from Canada who visits people in serious debt and she uses this type of system with jars.

Keep in mind that this system is not for everyone. Many families have multiple accounts where funds are transferred in and out and bills are paid online, but if you have a fairly simple budget, then give this method a try. It takes time to get used to it, but it is an effective budgeting tool for all families.

Disclaimer: I am not a financial advisor. I used this method and had success, but everyone has different financial situations and results.

Questions & Answers

    © 2012 Claudia Mitchell


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      • Glimmer Twin Fan profile image

        Claudia Mitchell 4 years ago

        Hi Audrey - I think it's a great idea to save like this for a specific item. The only problem is the temptation knowing that envelope is sitting in the house. But it's definitely worth it. Thanks so much for commenting.

      • AudreyHowitt profile image

        Audrey Howitt 4 years ago from California

        Helpful! I use this system, but for saving for specific items like a new computer or new tv--that kind of thing--and I really like it

      • Glimmer Twin Fan profile image

        Claudia Mitchell 4 years ago

        Thanks for the comments Hendrika - It sounds like the cash system works well for your needs along with your other system.

      • Hendrika profile image

        Hendrika 4 years ago from Pretoria, South Africa

        Our pensions are paid in cash so we actually have a double system. We have some other incomes that are paid by EFT. So for the payments that are easier to do by EFT we do it and I keep a spreadsheet of those expenses. For the cash we use the envelope system. Works very well for us.

      • Glimmer Twin Fan profile image

        Claudia Mitchell 4 years ago

        Hi tillsontitan - NYC was so expensive, especially for me being right out of college so this helped me too. Those were the days, treating myself to a cheap chinese takeout meal once every 2 weeks. Thanks for reading and glad you found the hub interesting.

      • tillsontitan profile image

        Mary Craig 4 years ago from New York

        I obviously agree with this system. When I first started working, in NYC, I got paid bi-weekly. I was afraid I'd go through all my money before the first week was out so I started an envelope system. Like your system, and like you, it worked for me. I am sure others will find this helpful.

        Voted up, useful, and interesting.

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        Thanks so much joym7. It is a really good tool for single people and couples too.

      • joym7 profile image

        Joy 5 years ago from United States

        This could be a great budge who are living individually. I have found this useful and interesting.

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        Thanks pstraubie! It really worked for me when I needed it. Hope it works for your daughter and her family too! Have a great day.

      • pstraubie48 profile image

        Patricia Scott 5 years ago from sunny Florida

        This is an interesting plan. I will pass it on to my daughter. She and her husband do pretty well budgeting but this might be a way to make things come out even better for them. I have so few expenses now that I am retired that I really do not have much trouble in this area. I will admit, I could have used this when I was still working and had a different life style. Thanks for sharing. :) Sending Angels to you this second day of the New Year. :) ps

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        Thank you rajan. It worked really well for me too. I hope it helps other people. I appreciate the comments.

      • rajan jolly profile image

        Rajan Singh Jolly 5 years ago from From Mumbai, presently in Jalandhar,INDIA.

        GTF, I have used this system and I found that it works really well when cash flow is tight. This way one knows the expenses that have to be met beforehand and one has made provisions for them. Emergency expenses can be handled better then.

        Voted up and useful.

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        Thanks Bill - Yep those first years out of college were tough and we still try to pay cash for everything. It's just the discipline is so hard sometimes. I appreciate the comments!

      • billybuc profile image

        Bill Holland 5 years ago from Olympia, WA

        Great suggestion, which could only come from someone who has lived from paycheck to paycheck by the skin of her teeth. Love it and yes, I have done it. I pay cash for everything and my reasoning is that I want each expenditure to hurt just a little. :) It also makes me more aware of my spending, and your sound suggestion insures that cash will always be there for expenses PROVIDED the person has discipline and uses the envelope money only for its purpose.

        Great job!

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        Hi teaches. I appreciate the comments. It really did work for me.

      • teaches12345 profile image

        Dianna Mendez 5 years ago

        I had a friend who suggested this method years ago. She used it and her personal finances were always balanced and she managed to save money over time. Excellent advice, Glimmer.

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        I appreciate you comments KDyBarry! I can't imagine living in a house of 9. I bet there are tons of envelopes! That is a lot to manage. Thanks for visiting.

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        Thanks Tracy. I know, those unexpected costs are tough. One can make an envelope for that sort of thing too. I appreciate the comments.

      • profile image

        KDuBarry03 5 years ago

        My mom has folders and envelopes just like these! Because of living in a House of 9 and two of us going to college, she has whole sorts of folders and envelopes to keep everything in check. This is definitely a great system to keep your personal finances in check! My mom's been trying to teach me about how to keep this in balance, but I think your explanation is easier to follow.

      • Tracy Lynn Conway profile image

        Tracy Lynn Conway 5 years ago from Virginia, USA

        I like the simplicity of your system. I find the hardest part of budgeting is being ready for unexpected expenses such as medical bills.

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        Hi Janine - I imagine has a math teacher you have the budgeting down pat. A good budget makes such a difference to family finances. Thanks so much for your comments and share.

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        Thanks for the comments fpherj! It is frightening how quickly finances can get out of control. It is good to get a handle on them. I appreciate the visit.

      • fpherj48 profile image

        Paula 5 years ago from Beautiful Upstate New York

        Glimmer Twin...Nice of you to share this valuable advice....that you have personally put to the test and found to work well. I am in full agreement that each individual find some way to handle their finances sensibly and learn how to create a budget they can live with. The important thing, as you seem to know, is to spend the time to focus on this issue and not let IT control you!!.....Excellent hub! UP+++

      • Janine Huldie profile image

        Janine Huldie 5 years ago from New York, New York

        Very nice system indeed. Thankfully the math teacher in me has it down to a science budgeting, but that doesn't mean I can't learn a thing or two from your system here. Have of course voted and shared too :)

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        recappers - For people with direct deposit, they would need to pull the paycheck amount out of the bank. A pain, I know, but it's worth it. With all of the online banking, it makes it tougher. Thanks for commenting.

      • Glimmer Twin Fan profile image

        Claudia Mitchell 5 years ago

        Thanks ehealer! Let me know how it works for you. Good Luck! I appreciate the comments.

      • recappers delight profile image

        recappers delight 5 years ago

        I think this might be especially useful for people who are living paycheck to paycheck and who cash their whole check at once. How might this be adapted for somebody who does direct deposit?

        We do something a little similar in our house, but only for discretionary money. Basically, I give everybody else in the family an allowance.

      • eHealer profile image

        Deborah 5 years ago from Las Vegas

        This is a great system and many people should know about it. I am going to try it, it's low tech and easy to accomplish. I for one, really need help with expense management and never follow through with whatever plan I have incorporated. I am gonna try it! Voted up and shared.


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