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The Money Envelope System: Save More Money!

Dr. Penny Pincher founded the popular personal finance blog Penny Pincher Journal in 2013 and has published two books about saving money.

Save more money with money envelopes!

Save more money with money envelopes!

What Is the Money Envelope System?

The money envelope system is a simple idea that has been around a while. You take out your budgeted amount for a particular expense category—in cash—and put the money in an envelope. Then you pay for expenses using only money from the envelope.

I have adopted a version of the money envelope system where I put funds for food and gas in the envelope every payday. The food category includes restaurants and groceries- all food expenses. Using a money envelope system has really helped us control food expenses which were taking up way too much of our money.

This idea of a money envelope is very simple, so how can this help you save a lot of money?

1. Guaranteed Budget Success With a Money Envelope

The first reason for using a money envelope is so effective is that it guarantees budget success. If you put your budgeted amount in an envelope and spend only up to that amount, you will achieve success. It is not possible to go over your budget if you spend only the money from the envelope.

In order for the money envelope system to be fully effective, you'll need to make sure to bring the money envelope with you every time you are going to buy something. This can take a week or so to get used to, but it becomes a habit quickly.

Use a money envelope to save money every day.

Use a money envelope to save money every day.

2. Automatic Feedback From Your Money Envelope

The automatic feedback is a key reason that using a money envelope works. Just after a payday, we have more money in the envelope and are more likely to eat out. As time goes on, we can see that there is less money in the envelope, and we know that we need to cut back on spending.

If you are using credit cards to make purchases, you do not get this real-time feedback on how much you are spending. Of course, you can log in and check your balances and transactions, but this takes work. If you use a money envelope for all of your purchases, you get automatic feedback on how much you have left.

3. You Always Have Cash Available

It is really nice to have cash around, and this is another benefit of using a money envelope. Previously, we used credit cards or debit cards for almost all of our purchases. If cash was needed, we had to make a special trip to the bank or ATM.

With a money envelope system, you will always have some cash on hand with no special effort. I like the reassurance of cash. Electronic banking and credit card systems could go down, and you would be left with no way to buy anything. Cash always works, even during a disaster!

It can be a bit inconvenient to get cash on payday and carry an envelope of cash around, but the convenience of always having cash around makes it more likely that you will stick with the money envelope system and keep using it to save money.

It is harder to spend cash—you'll hang on to more of your money!

It is harder to spend cash—you'll hang on to more of your money!

4. It Is Harder to Spend Cash!

Not only does the money envelope guarantee budget success and provide automatic feedback on how much you have left to spend, but using a money envelope helps you to spend less because it is harder to spend cash.

Swiping a credit card is easy, and you don't really notice the impact of spending on a credit card until you get your statement. The impact of spending cash is immediate- you'll have less in your envelope.

There is a psychological factor that makes it harder to spend cash. When you have the cash in your hand, you can see it and feel it. You don't want to let it go. It is more painful to spend money using cash than using a credit card or a debit card, and as a result, you'll tend to spend less.

If you are at the checkout line and decide to put something back that you don't really need, you'll get an immediate benefit—more cash in your envelope.

Using a money envelope lets you take advantage of the fact that it is harder for most people to spend cash. You will automatically find ways to spend less to reduce the pain of handing over cash.

5. A Money Envelope Forces You to Set a Budget

In the bad old days, we didn't really have a budget for food. We bought groceries and used a credit card to buy what we wanted. We went out to eat sometimes but didn't really know how much we were spending. Sometimes we would look back on our statements for a previous month and be amazed at how much we were spending on food.

Having a money envelope forces you to decide how much you want to spend and set a budget for yourself. This is an important step in getting spending under control and setting yourself up to begin saving money.

The money envelope also helps you with the next step—staying on your budget after you decide how much you want to spend.

Steps to Boost Your Savings With a Money Envelope

We have reviewed several reasons why the money envelope system works to save money and keep you on target for your budget. How can you get started using the money envelope system?

  1. First, you'll need to decide what expense category and budget amount to start with. I picked out food and gas. I looked at credit card statements to see how much we were spending each month and picked out a budget goal.
  2. Next, you'll need to get the money to stock your envelope. I stop by my credit union every payday to get cash for my envelope.
  3. Once you have cash in your envelope, you will need to remember to keep it with you any time you are going to spend money. Some people use multiple money envelopes for multiple expense categories, but I have stayed with one money envelope to cover a couple of types of expenses. I like to keep the system as simple as possible to make it more likely that we will stick with it.

A great problem to have is ending up with extra money in the money envelope on payday. We take any extra money that is left in the envelope and put it into an emergency cash fund.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2015 Dr Penny Pincher


Dr Penny Pincher (author) from Iowa, USA on September 18, 2016:

Hyacinth, I am glad I tried using a money envelope since it helps me spend less every month. I hope it works for you too.

Hyacinth on September 17, 2016:

i have not tried the money envelope yet but you bet am going to I feel this is just what I need , thank you

this is such a good idea.

Dr Penny Pincher (author) from Iowa, USA on December 13, 2015:

Blond Logic, you have a good point about carrying a lot of cash around just after filling the envelope- we do leave some of the cash at home or locked in the car when we go into a store so we don't flash a big stack of cash when paying. I am surprised how well this simple system has worked for us.

Mary Wickison from USA on December 13, 2015:

That is a great idea. You're right about it being easier to swipe a card, I find for me to part with cash takes some doing. Also that visual reminder as the money begins to go down, it is a great motivator.

My only concern would be carrying around "a wedge of cash" towards the beginning of the month. I think I would opt for having two envelopes, one to take with me during the shopping trip and the one to top up.

This is a timely reminder as I am sure many people will be setting budgeting resolutions in the new year.

Dr Penny Pincher (author) from Iowa, USA on December 13, 2015:

FlourishAnyway, if you can get started on the envelope system, you are sure to save money! Thanks for your comment.

FlourishAnyway from USA on December 13, 2015:

I haven't tried this but might have to.