Budgeting with the Envelope Method

You will need:
  • Several long envelopes
  • A thick black marker or printer
  • A current budget
  • Cash
  • A 3 hole punch (optional)

Time required: Under half an hour

Sometimes keeping track of mid-month expenses can be difficult. Wouldn’t it be nice if there was a way to know exactly how much money you had left in a given budget category? Fortunately there is a way and it’s very easy! It’s called “The Envelope Method”

The basic idea of the Envelope Method is that each budget category is given an envelope, and the budgeted amount of cash is inserted inside. As the month goes on, food expenses are removed from the food envelope, fun expenses are removed from the fun envelope, etc until the month is over or the envelope runs out of money.

How to Budget with the Envelope Method:

Step 1. Label envelopes with budget categories

Once you have completed your traditional budget, label an envelope with the name of each category on your budget. These categories can be the same as on your budget worksheet, or even more specific. Typical categories would include: food, entertainment, gas, etc. I like to label the envelopes with a large felt marker, but it probably would look nicer to just print them from a computer. Once you have labeled each envelope, it’s time to fill up!

Step 2. Stuff the envelopes with the budgeted cash

Using the amounts from your budget, fill each envelope with the appropriate amount of cash. Write the budgeted amounts on each of the envelopes so you will remember how much you started with. When you withdraw cash to use in your budget, consider whether it makes more sense to use high denomination bills ($100’s & $50’s), medium denomination bills ($20’s & 10’s), or a thoughtful mixture of every size. There is little more frustrating than a “Candy” envelope filled with only $50’s, and a “Rent” envelope full of $5’s.

Step 3. Use the envelopes for your daily transactions

When going shopping, spend money from the appropriate envelope and replace it with the receipt and change. If you use a new set of envelopes each month, then it makes sense write your transactions on the back. Recording the expenses on the envelope can help you keep a running total of your budget without having to count your cash.

If during the month you find that you underfunded one category and overfunded another, you may “steal” money from one envelope and transfer it to another. When “stealing” money, be sure to record  it on the back of EACH envelope. For example: If I overfunded “Food” and underfunded “Candy” (I tend to have a sweet tooth) I could write on the food envelope “Withdrew $20 -> Candy” or something similar. On the Candy envelope I would write “Deposit $20 from Food”. That way at the end of the month I can make adjustments on the next budget.

Step 4. “Balance” the envelopes each month with your budget

At the end of each month, take each category and add up all the remaining money and receipts. It should all add up to the original budgeted amount unless you had to “steal” from another category. Make a note of which envelopes had excess money and which had too little. This information will help you when creating next month’s budget.

Step 5. Repeat Step 1

That’s all there is to it! Start again at step 1. After a few months, you will notice that your envelopes contain just enough money and you rarely have to transfer any. That’s a sigh that you are in control of your money.

Tips for better envelope budgeting:

  • Have a special change jar for each category. Having the coins in a separate container helps keep the envelopes light.
  • Some people will hole-punch their envelopes so they can be carried in a planner or a binder.
  • Keep a “Petty Cash” box at home, so you can trade your coins back into bills. When you get enough coins, go to the banks and trade them for bills.

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