Have You Heard of Envelope Budgeting? Here's Why You May Want to Give It a Try

by Maurie Backman | Sept. 19, 2019

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It may be old school, but it works!

Many people avoid budgeting because they're convinced that it's a difficult thing to do. The reality is that you don't need to be a spreadsheet wiz to succeed at budgeting; all you really need to do is list your existing expenses and compare your total spending to your earnings. But if the idea of sitting at a computer to budget is too intimidating to you, there's another option you may want to try: envelope budgeting.

A pair of hands separating stacks of money into envelopes.

Image source: Getty Images

How envelope budgeting works

Back in the day, bills used to get paid with physical cash. As such, people would send money in envelopes addressed to their various billers to fulfill their obligations. 

Envelope budgeting upholds this concept. With envelope budgeting, you first determine the various categories you spend money on (think housing, transportation, utilities, food, clothing, and entertainment, to name a few). Then you figure out how much money you need on a monthly basis for each category.

Now here comes the fun part: You withdraw enough cash to cover the expenses you've mapped out and stick it in your designated envelopes. And that's all the money you get to spend that month. This means that if you designate $200 for restaurants and entertainment, and you use that $200 up by the 21st of the month, you're limited to home-cooked meals and free leisure activities until the following month starts and your $200 in that category renews.

Of course, you do have the option to take money from one envelope and add it to another -- for example, if you use up your $200 for entertainment but still have another $100 available for groceries, you could take some of that money to pay for movie tickets or a concert. But then you may find yourself eating instant noodles for the rest of the month because it's all you can afford. 

Is envelope budgeting really effective?

The quick answer? Yes, and here's why: When you have a pile of cash you can see getting smaller and smaller by the day, it sends a warning signal to your brain that says, "Be careful, and stop spending."

By contrast, when you charge expenses on a credit card, you don't really feel the impact, because you're not parting with actual money; you're just swiping or inserting a piece of plastic and calling it a day. But handing over physical cash is more visceral, and if you've struggled to save money in the past, it could pay to give envelope budgeting a try. 

Now keep in mind that paying some bills with cash isn't so feasible -- you're not going to stick $1,000 in cash in the mail to satisfy your mortgage payment. The best thing to do is withdraw cash for some of your smaller, variable expenses, and stick to checks for larger fixed bills, like your rent or car payment. The bills that get paid by check should still get an envelope with an amount on them so you account for their costs, but this way, you also pay them in a more sensible fashion. 

Another cool thing? You can use the envelope budgeting method without having to withdraw wads of cash month after month. You can buy software like Mvelopes (or find source free options online) that allows you to create virtual envelopes linked to your expense categories. As you spend money in those categories, you update your envelopes (or it happens automatically, depending on the program) to indicate that you have less funds available. And when you get your next paycheck, your envelopes are replenished, either manually or automatically.  

Following a budget could help you avoid overspending and racking up debt in the process. If you're not thrilled with the idea of creating a massive spreadsheet to track your spending, give the envelope budgeting method a try, whether physically or virtually. With any luck, it'll help you do a better job of managing your money.

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