How to Budget Using the Envelope System

Divide Cash to Stay on Target

••• Photo © Erin Huffstetler

Whether you're looking to go cash-only or simply wish to , the envelope system is a great budgeting tool. Learn how to put the envelope system to work for you. Setting up an envelope budgeting system is easy and takes about an hour. You can either put actual cash into each envelope or specify an amount and then keep a tally on an envelope of what's allotted for that category and what you spend with a debit card

What You Need

  • Envelopes
  • Pen or pencil
  • Copy of your budget

Here's How

  1. Create a budget: For the envelope system to work, the first thing you need to know is how much money you have coming in and how much you have going out. Start by creating a budget that reflects your current financial situation.
  2. Separate your expenses: Expenses like a mortgage payment or rent, utilities, and insurance are difficult or impossible to pay with cash and also virtually the same every month. These should not be part of your envelope budget. Subtract these expenses from the total coming in each month and then divide the remainder among the envelopes.
  1. Divide your spending into categories: Look over your budget and divide it into  that you can cover with cash or a debit card: food, gasoline, clothing, and entertainment are the big four, but include all that apply to you. Then create an envelope for each category. No need to be fancy; a plain, white envelope with the category written on the front will do.
  2. Fill your envelopes: Fill each envelope with the money that you've allotted to that particular category or indicate on the envelope the amount you want to spend in that category.
  1. Spend until the money is gone: Pay for your purchases out of the appropriate envelopes--use the food envelope for food purchases and the clothing envelope for clothing purchases--but only until the money is gone. If you're using a debit card, subtract each expense on the envelope until you reach zero. At that point, all spending in the drained category must cease until the next month.
  2. Put any leftover money into savings: If you have any money left in your envelopes at the end of the month, add it to your savings or use it to pay down a debt.
  1. Refill again the next month: Refill or mark the envelopes and start again. Each month is a new shot at making your budget work.


  • Tweak your category allocations over the first few months until you arrive at numbers that work for you.
  • If you're not used to paying for your purchases with cash, it may take a few months to adjust to the envelope system. Don't beat yourself up if you run out of money before the month is over. Just try harder to stay on budget the next month.
  • If a monthly envelope system doesn't work for you, try a weekly or bi-weekly envelope system. The goal is to create a system that keeps your spending under control.