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Does the Envelope Method Work?

Written by Beth Trach

If you’re serious about getting your financial life in order, the unavoidable first step is that you absolutely must have a household budget.

And you have to stick to it.

So what’s the best way to make sure that happens? Lots of people swear by the envelope method. It’s a decidedly old-fashioned way of looking at your money, but that can be a good thing.

To know if it’s right for you, you’ll have to understand what it is and how to modify it for your situation.

Envelope Method Basics

The envelope method of budgeting is very simple on the surface. You take each budget category — rent, groceries, gas, entertainment, utilities — and assign it an envelope.

Not a virtual envelope. A real, honest-to-goodness paper envelope with a flap and everything.

Next, you label each category on the outside of its envelope. If you need help remembering the amount you budgeted for each category, you can write the monthly dollar amount on the front of the envelope, too.

The next step comes when you get paid. Hopefully, you still get an old-fashioned, live check in the mail, so you can take it to the bank and cash it. Ask for small bills so you can easily divide the wad of cash into each envelope. For example, if you have budgeted $400 a month for groceries and you get paid every week, you’ll put $100 of your paycheck into the grocery envelope each time you get paid. Repeat for all your other budget categories.

When it’s time to pay the bill, you take the money out and use it. This means taking that envelope with you when you go to the grocery store and shopping with cash. It can also mean having to go back to the bank to deposit the money so that you can cover a check you write to the electric company or other vendors that don’t accept cash.

When you’re out of money in the envelope, you’re done spending. That means that if you really wanted a pair of shoes for a friend’s wedding but you only have $15 in your clothing envelope, you’re out of luck. Shine up the old ones and deal with it, knowing that you’re coming out ahead by sticking to your envelope budget.

Advantages of the Envelope System

Lots of people have great success using this method to get ahold of their finances and stick to their budgets. Here’s why:

  • It’s tangible. When you start dealing in cash, you have an undeniable visual cue that lets you know exactly how much money you have to spend on something. This is much easier to track than just looking at your total bank balance once a week, because you’ll have to do a lot of mental math to account for all your bills to know how much disposable income you actually have.
  • It’s harder to part with cash. The other benefit to paying for things in cash is that you have a psychological check every single time you go to buy something. Handing over your hard-earned money in person feels real, and you’re likely to think twice about doing it. This is totally different from swiping a card, which can feel very much like play money — until you get the bill, of course.
  • You see your budget in action. One of the lesser-known advantages to the envelope system is that it helps you keep your eye on the parts of your budget that might slip under your radar. For example, you might not need a car repair or vacation every month, but stashing money in those envelopes is a great reminder of your other spending areas each time you get paid.

Drawbacks of the Envelope System

Of course, no system is perfect. Here’s what people find most difficult about the envelope system:

  • It’s too old fashioned. In the modern world, you want to be able to enjoy the convenience of direct deposit and online bill pay. The envelope system’s insistence on cash adds an extra step or two as you cash paycheck and shuffle bills back and forth.
  • It’s not a good investment. Keeping your money in an envelope instead of in an interest-bearing account means you won’t earn anything on it. This can add up over time and shut you out of the benefits of compounding interest for the long haul.
  • It’s too rigid. If you’re over-zealous about the envelope system, you could end up making some bad financial decisions. For example, you might miss out on a great sale price for something you were going to buy anyway, or you could end up using your credit card for an emergency when you could just cheat a little and shift money from another envelope to cover you.

How to Get the Most Out of the Envelope Method

To avoid these drawbacks, it’s probably best not to try to cover your entire budget with the envelope system. Shuffling cash in and out of your bank account just so you can look at it in an envelope isn’t really sustainable when you want to pay your bills online, and it could make you give up the whole experiment out of frustration.

Instead, try making envelopes only for the budget areas where you tend to overspend. This is likely to be in semi-discretionary categories like groceries, entertainment, clothing and hobbies, to name a few. In any category where your problems are about willpower, the envelope system is a powerful reminder to stop spending when you run out of money. It’s also a great way to make help teach kids about the importance of budgeting and to open up family dialogue about how you want to use your money together: Will you splurge for pizza every Friday or save up for Red Sox tickets instead?

I personally use the envelope system for entertainment money, and it definitely helps keep my household on track. We tend to overspend on eating out when we get busy, so this helps us to get a grip and hit the grocery store instead, so we can save our money for something more fun.

Do you have success using the envelope system? Share your tips and tricks in the comments!  

About the author

Beth Trach

Elizabeth Trach is a writer and editor living in Newburyport, MA. She also sings in a band, grows almost all her own food, and occasionally even cooks it. You can catch up on all her adventures in frugal living and extreme gardening at Port Potager.

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