All About Envelope Budgeting

If you're a follower of the Dave Ramsey radio show, then you already know what envelope budgeting is. But just in case you're not, here's a quick explanation of what it is, how to use it, and why it might (or might not) work for you.

Envelope budgeting is a manual budgeting system that uses envelopes to store budgeted amounts of cash. Every budget category has an envelope. This way, you guarantee you won't spend more than the budgeted amount.

How Does Envelope Budgeting Work?

1. Make a budget.
2. Label envelopes for each major budget category.
3. On payday, put the budgeted amount in each envelope.
4. Take the money out of the envelopes to spend as needed.
5. On next payday, deposit surplus funds in a savings account, carry over into the next pay period, or transfer to another envelope.
6. Start over at step 3.

There are lots of variations on this system. Some folks use a debit card instead of cash to purchase items and then fill their envelopes with paper, noting starting balances each payday and then subtracting what they've spent based on receipts stored in the envelopes.

Some people do the exact same with credit cards, in order to benefit from points or rewards programs.

Envelope budgeters have been known to use Ziploc bags or coupon organizers instead of paper nvelopes.

Some don't believe in carrying lots of cash or receipts around in fragile white envelopes, annoying Ziploc bags or organizers (myself included) and so prefer to use online envelope budgeting software like Goodbudget.

The greatest benefit of envelope budgeting is that you don't just track spending after the fact; you actually allocate your income to expense categories BEFORE you spend any money. You can never go "over budget".

If there isn't any money left in the "Food" envelope, you can't make another trip to the grocery store. (Or, you'll have to borrow money from another envelope.)

Dave Ramsey

One famous proponent of this form of envelope budgeting is the personal finance and budgeting guru Dave Ramsey. He explains it in detail in his best-selling book "Total Money Makeover".

Ramsey has a TV show on Fox Business Network as well as a radio program you might be able to catch locally.

Not surprisingly, Ramsey also has a "deluxe envelope system" available at his online store.

(Personally, even if I had that "designer envelope system", I'd still use receipts to fill the envelopes, not cash. I don't like to carry cash around.)

How To Get Started

You can't start envelope budgeting until your personal budgeting is complete. (If you need help with that, just visit our handy how to make a budget page.)

Once your home budget is in place, decide which budget categories you need to control most. Typically, these will be the categories where you have the most discretion over what gets spent. For my family, that would be categories like gas, groceries, eating out, entertainment, clothing, entertainment, and so on.

These will be the "envelopes" you'll use most.

But what about those fixed expenses that you can't control?

Easy. You won't need envelopes for those, because if you followed our how to make a budget articles, you should know exactly how much money comes out of each of your paychecks for all fixed expenses, including irregular expenses like annual or semi-annual premiums.

You'll also know the total amount of "spending money" you have available each time you get paid--and THAT is the amount of money you need to control using envelope budgeting.

How To Set Up Your Envelopes

You can utilize actual legal-sized envelopes, Ziploc bags, coupon organizers, small accordion files from office-supply stores, or a fancy-schmancy envelope budgeting system like Dave Ramsey's. Create one envelope for each budget category and label clearly.

If you decide on the debit or credit card system, all you need to do is put a slip of lined paper in each envelope to record cash flowing in and out. On payday, note the date and how much "money" you're depositing into that envelope. Then, as you spend money in that category during the pay period, subtract what you spent from the starting balance. Put receipts right in the envelope--it's a handy way to keep track of them!

If you're using a cash-based envelope system, simply fill each envelope with the budgeted amount of cash on payday.

How Do I Pay Bills Using Envelope Budgeting?

If you're using the cash envelope system for discretionary expenses, then withdraw the cash you need to fill your envelopes as soon as you get paid. Don't forget to make sure your checking account has all the funds you need to write checks for certain bills you don't pay for with cash, like a mortgage or car payment. (Having a well-designed budget should make this automatic.)

If you're using the debit card or credit card envelope system, you need to make sure you have enough cash in your regular checking account for envelope spending. Remember, you'll be "spending" your envelope money by either debit card withdrawal or payment in full on your credit card. Put a slip of paper in each envelope noting the "beginning balance" for that category. As you spend, subtract amounts from your running balance in the envelope. Slip receipts in the envelope for handy recordkeeping.

If you're using an online envelope budgeting system like Goodbudget, then you don't have to do a thing with actual envelopes. You just set up your paycheck in the system and create envelopes and spending allocations. Link to your bank account and debit card or credit card accounts. Each time you get paid, your "envelopes" get filled. Each time you spend money, your "envelopes" are emptied accordingly. You can make manual adjustments as needed.

Any way you choose to manage your envelope budgeting, by using this system you're keeping yourself within your personal budgeting limits.

What If I Have Money Left Over On Payday?

Wow, what a great problem to have!

If you end up with a surplus when your next payday rolls around, you can either transfer it to a savings account, transfer it to another envelope, or let the balance roll over and accumulate. Don't keep it complicated. As long as you aren't spending more than you allocated, your total outgo is less than your inflow, and you are sticking to your budget!