Personal Finance 

What Is Envelope Budgeting?

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Envelopes for budgetingEnvelope budgeting is a very popular and very intuitive way to budget your spending.

I had heard the term used frequently but I never really understood what the whole envelope budgeting process was or why it was successful. In fact, I actually thought envelope budgeting meant that you were loosely tracking your spending on the back of envelopes or something like that (I was totally wrong!).

Envelope Budgeting

In envelope budgeting, you categorize your spending into broad categories and assign an envelope to each. You might have one for dining out, one for groceries, one for utilities, etc. You decide how much you will spend in each category for the month and put cash into that envelope. As you spend in the category, you take money out and return the change. If you run out, you must pull from other envelopes.

This forces you to spend within your means within a month because you can only spend the money that’s in those envelopes. It’s an extremely effective method of budgeting if you are able to maintain it.

Advantages of Envelope Budgeting

The reason why envelope works is because it makes people plan up front instead of winging it each month. It also restricts how much you can spend from both an individual category perspective (each envelope) and a monthly total perspective (all the envelopes). When an envelope runs out, you can only pull funds from another envelope, which limits how much you can spend each month.

It’s also a very simple system, making it easy to adopt and maintain. You don’t fill out fancy spreadsheets, there isn’t a complicated tool to learn, you just need envelopes.

Disadvantages of Envelope Budgeting

A disadvantage of envelope budgeting is that you have less information. You know you spent $500 on “food” last month, where can you cut back? Since you don’t track your spending, by default, you don’t know how much was spent on groceries and how much was spent on restaurants. It requires you to remember, rather than having a tool remember.

Fortunately, you can tailor any tool for your own needs. You can track month to month spending on the back of the envelope or you can stick receipts in the envelope to help track your spending. It’s a simple enough system that you can adjust it to fit your needs or capture the information you need.

Update: According to the comments, if you’re looking for an online version of this envelope budgeting system, Mvelopes offers this type of service (and they have a 30 day trial).

(Photo: evilpeach)

{ 9 comments, please add your thoughts now! }

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9 Responses to “What Is Envelope Budgeting?”

  1. Trent says:

    I’ve tried the envelope system, and for simple things it’s ok. But there always seemed to be circumstances that came up that required someone to flip out the CC to pay. (Music lesson payments that were forgotten, needed more gas for the car, unexpected school supplies needed). It was little things, but it disrupted the system for us so badly we dropped it in favor of a ‘general’ budget and pay off the card each month. It’s not perfect, but it fit our situation better.

  2. DP says:

    This is what does.
    You can track your expenses in as detailed fashion as you want: just customize you envelopes in any hierarchy that you wish.
    It’s also a good tool for tracking your net worth.

  3. nelson says:

    I thought I’d like the envelope budgeting system, but I didn’t for basically the same reasons why you don’t like it, Jim. I wanted to try the envelope budgeting because I was trying to save up for certain items over a few months and I wanted to see my progress. I wanted to put money in every month and have the balance roll over.

    It ended up being more of a hassle than it was worth.

    Now I just set up a “loose” budget and keep track of spending categories in Quicken. A monthly deposit of fun money goes into a separate savings account earmarked for a vacation or larger purchase (over $100). It’s kind of like an emergency fund for my wanderlust or gadgetlust.

    Plus, mvelopes scares me. You have to give them your account info for ALL of your accounts. I’m sure they’re very careful with that information, it’s just not my bag.

  4. MoneyDummy says:

    You could always track your spending by just putting your receipts into the envelope from which the cash came.

  5. Leah says:

    Let me second the recommendation.

    It counters all the negatives you noted, leaving you with some of the easiest and most detailed expense tracking systems you’ll ever find.

    I hated using quicken, MS Money, and other online based systems, because they required so much work on my part. But the Mvelopes system makes everything so painless and fast I was in love instantly.

    Try their free trial and see if you don’t fall in love as well.

  6. MELANIE LAGO says:

    I used to do envelope budgeting when I was newly married, with one baby and living off just one salary, while my husband was in med school. It worked for me and helped me manage our meager income. Ithink I should go back to it again.

  7. skadoo323 says:

    Another idea I got from another forum was to have an ING Direct account with multiple savings accounts, such as one for my cell phone bill, one for my utility bill, etc. This seems like a decent method, plus you get interest while you set aside the needed funds.

  8. ocasiom says:

    I have been using this little application for a little over 3 months now and it has worked fine for me:

    It is based on the budget system and keeps track of individual spending per envelope. It’s also only $30 (I don’t work for them or make any commissions, real user comment).

    In response to Trent’s comment about his budget breaking because of unplanned (non-emergency) expenditures, I recommend allocating a “Cushion Envelope” each month to take care of those. With time you may see a pattern in your “unplanned” expenses by looking at the history of your Cushion Envelope and adjust your budget accordingly, maybe you’ll need to plan for a few extra envelopes

  9. Aaron says:

    I’ve used many different methods of managing my personal finances and agree that there are some great products out there. As a prior Quicken user for over 9 years, I have a tremendous respect for the program and everything it can do. But sometimes, less is more. The benefit of envelope budgeting, if it is used effectively, is that you can see exactly how much money you have in each account as well as in each “envelope” in your budget. The practical management side to using it effectively is having the discipline to contain spending within the envelope limits. As far as programs go, if you aren’t yet comfortable with managing your money totally online or don’t want to pay a monthly fee, you might want to try a new envelope budgeting program, CommonCents 2007. It can be downloaded from

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