The Envelope Budgeting System and Why it Works

Most people these days understand the importance of creating a budget. A budget can help you track your spending, manage your expenses, and save money for the things you want and need.

Creating a budget can be a fairly simple prospect. Sticking to that budget, however, is a whole other story. It’s for this reason that the envelope budgeting system is such an effective tool, especially for those who struggle to adhere to the budgets they draw up.

How it Works

As the name suggests, the envelope budgeting system involves putting actual hard cold cash in different envelopes, each with a specific designation. Under this system, you’ll have one envelope earmarked for your rent or mortgage payment, another for food, a third for your cable bill, and so forth. Instead of paying your bills from a single bank account, you’ll take the money you need out of the appropriate envelope as often as needed over the course of a given month.

Let’s say you typically need $400 per month to pay for groceries. Instead of charging food on your credit card, you’d fill your grocery envelope with $400 in cash at the start of the month and physically dip in every time you go to the store.

The Downside

Technologically speaking, the envelope budgeting system is a major step backwards. After all, who wants to sit there counting out cash when bills can be paid online or via apps and debit cards? Additionally, using cash for all of your purchases means potentially losing out on the chance to build credit, not to mention the cash-back incentives most credit cards offer.

But Here’s Why it Works

Though the envelope budgeting system might seem a bit dated, it can be really effective in helping you avoid overspending. Remember that $400 grocery budget? Let’s say you plow through it more quickly than expected and find yourself with just $80 left when you still have half a month’s groceries to buy. Once you see that short supply of cash, you’ll be more inclined to shop wisely during your last few grocery runs.

The envelope budgeting system can also be extremely helpful when it comes to keeping tabs on your spending. Let’s say you withdraw $100 in cash from an ATM and use it to pay for things like coffee and restaurant meals. That money might be gone before you know it. On the other hand, if you put money into specific envelopes, you’ll know exactly where it’s going. And, because you can see your supply of cash physically diminishing in front of your eyes, you’ll be less likely to overspend on frivolous things.

The Bottom Line

While the envelope budgeting system does have a few disadvantages, it can be a great form of self-discipline when it comes to spending and saving money. If you’ve struggled to stick to a budget in the past, you may want to give the envelope system a try. Besides, there’s nothing like the feeling of peering into those envelopes at month’s end and seeing a few extra dollars lying around.