How To Use The Envelope Budgeting Method
HomeHome > Blog > How To Use The Envelope Budgeting Method

How To Use The Envelope Budgeting Method

Aug 17, 2023

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.

Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

At Bankrate we strive to help you make smarter financial decisions. While we adhere to stricteditorial integrity,this post may contain references to products from our partners. Here's an explanation for how we make money.

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.

Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.

Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money.

Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.Here is a list of our banking partners.

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.

Bankrate follows a stricteditorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.

We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service.

The envelope budgeting method asks you to allocate cash into separate envelopes based on a spending plan you create ahead of time. You can go ahead and pay your mortgage, utilities and other regular bills with another form of payment, but you’ll rely on actual cash in envelopes — or their digital equivalent — to pay for discretionary expenses like groceries, gas and entertainment.

What’s the benefit of envelope budgeting? According to financial coach Steven Donovan, money management is 80 percent psychology and only 20 percent math. So, the big idea is to help users build positive financial habits.

“Our eyes see the cash coming out from the envelope and we understand mentally that money is not coming back in our wallets or purses,” Donovan says. “We actually feel the money leaving our possession.”

That’s much different than with a debit card or credit card, he says, since you don’t watch the money leave your possession and you may not realize the impact of your spending until later on.

The envelope budgeting method asks you to sit down and create a spending plan that makes sense with your income while covering all your regular bills and estimated expenses. Also note that you may be able to use a budgeting app to create digital envelopes. This is the case with Qube Money, an app that lets you utilize the envelope budgeting method with your smartphone thanks to digital envelopes, or “qubes.”

Emily Guy Birken, author of “End Financial Stress Now,” believes envelope budgeting is one of the most “intuitive” ways to handle pre-spending money management — mostly because you have to think ahead about your financial needs for the month. And while this budgeting method requires more work upfront, the end result is less math required once your envelope budget is set up and your envelopes are stuffed.

“You have given yourself guardrails around your spending so you don’t have to either constantly try to keep track of your money in your head or constantly try to bounce back from unintentional overspending,” Guy Birken says.

If you’re interested in envelope budgeting using physical envelopes and cash, here are the main steps you’ll need to take.

Bob Lotich, a founder of SeedTime Money, says the first step you should take is to review your current bills and how you’re spending right now. That way, you can get an estimate of your current fixed expenses (mortgage, utilities, insurance, etc.), as well as how much you’re spending in miscellaneous categories.

If you already track your expenses, this part will be easy. If not, you can pull up your online banking and do your best to categorize your expenses over the last three months.

“Once you’ve done that, you will have a better idea how much money to allocate for each category going forward,” Lotich says.

Once you have an idea of how much you spend each month, you’ll want to figure out some areas to cut. Maybe you’re overspending on subscription services, or perhaps you’re spending a lot more than you thought when you shop online. Either way, you’ll want to set limits for the main categories you spend in each month.

Here’s an example of how your written budget might look if your take-home pay is $4,000 per month:

Total: $4,000

Once you complete that last step, Lotich says that you just need to figure out how much cash to withdraw. As he sees it, when you’re first starting with envelope budgeting, you should try to pay cash for any category of purchases you can. However, it’s considerably more practical to pay certain bills online every month, such as your cell phone bill, your mortgage, your car insurance and your utility bills.

Using the example above, you would probably plan to pay the following bills online:

Total: $2,515

From there, you would withdraw $1,485 to cover the following bills you could pay in cash:

Total: $1,485

Once you have the cash in hand for the month’s spending, you will physically put the cash into separate envelopes for each category. You will also label each envelope so you know what the cash inside is meant for, whether that’s “groceries,” “restaurants” or “transportation.”

Harrine Freeman, a financial expert and founder of H.E. Freeman Enterprise, says that envelope budgeting is easy to do from here — at least until it’s not. All you have to do is use the cash in each envelope for the appropriate purchases throughout the month, taking special care to make your money last.

If you don’t make your money last, then that’s where things get hairy. “When the envelope is empty, you cannot spend any more money in that category,” Freeman says.

For envelope budgeting to work, Lotich says that you have to quit spending in that category for the remainder of the month, versus spending the money anyway and letting it work itself out.

“If you want to go to the movies but realize your entertainment envelope is empty, it doesn’t mean you steal from your food envelope,” he says.” It means you get to stay home and read a book or play some board games with friends.”

Once you make it through your first month of envelope budgeting, you will probably want to tweak your categories so they work better for your spending. You may have found that some purchases are inconvenient to cover in cash, or perhaps you need a lot more money for groceries than you thought, resulting in you having to cut spending in another category.

Either way, you should expect to get better with each month you use envelope budgeting. Over time, you should become accustomed to how much you need to spend and how to cope when you run out of money before the month ends.

While the envelope budgeting method can be useful, consistency is key, Guy Birken says. If you struggle with taking consistent action with your finances, then it’s possible the envelope budgeting process could be a true non-starter in your life.

Either way, read over the pros and cons of envelope budgeting and ask yourself if you believe this budgeting method might help you get on track. If you believe you could save money and become more intentional by using cash instead of credit cards or debit cards, then it could be worth giving envelope budgeting a try.

SHARE:Holly D. JohnsonArrow RightTotal:Total: $2,515SHARE:Holly D. JohnsonArrow Right