What is the Envelope System and How Does It Work?

Are you living paycheck to paycheck and feel like you’re not moving the needle trying to pay down your debt or you’re just starting out and you don’t know how to control your money?

The envelope system is nothing new and your Parents probably used it too. Some people don’t know how it works. Let me show you!

What is the Envelope System and How Does It Work?

The envelope system is a system that has you portion your income into separate envelopes with the category written on it that it belongs to things like groceries, rent, or a car payment. Each pay period you put the required amount into the envelope and each month you pay your bills out of only those envelopes. The envelope system works by having you budget using only those envelopes and when the money’s gone you can no longer spend from that category. 

Step 1: Set Your Budget

Establish what things you need to set money aside for each month, especially the ones that you tend to go over budget on. 

Some of these categories that work best for the envelopes are:

  • Groceries
  • Gas
  • Entertainment
  • Car Repairs/Maintenance
  • Gifts

Then figure out what that budgeted amount should be. If you have a partner then make sure that you and your partner are on the same page when shopping alone, but pulling out of the same envelope. If you are prone to impulse buys then look at this as a way of sticking to your monthly budget for that item.

Step 2: Create and Fill Envelopes

Now take an envelope and label it with the name of the budget item like Groceries. Then write how much a month you are setting aside for that item.

Next, divide that number by how many times you get paid a month and this will be how much you set aside in the envelope each pay week or pay period.

So, if your monthly budget amount for groceries is $400 and you get paid once a week then you would set aside $100 a week. If you get paid twice a month then you would set aside $200 a pay period.

Step 3: Spend from the Envelopes

Spend only the cash from the envelope it belongs to. When the money’s gone it’s gone! Be intentional about your spending. The purpose is to help keep you on track and stick to the budget you’ve created. 

You can go as far as saving your receipts and putting them back in the envelope the money came from. Then at the end of the month you can look at your spending and see if you need to adjust your budget for next month. 

You may find you don’t need as much and that money can be used somewhere else to pay down debt or save up for something else you would like. 

What if I’m tempted to borrow from other envelopes?

You might be tempted to borrow from other envelopes. What do you do? It won’t be easy. Change never is. You’re really learning to change a habit that you have.

You’re not good or bad if you don’t, but the cycle will just continue where you have more month left than you have money to cover it with. The great thing about using the envelopes though is it’s not as easy as a swipe and buy lifestyle. You will still have to think about your purchases.

What if I spend all of the cash?

If you spend all the cash then you are done. You don’t pass go and you don’t collect $200. You either didn’t budget correctly for the week or the month.

What you don’t want to do is use money from another category to cover another debt. The cycle will never stop then.

What if I do everything online and don’t carry cash?

You can still do this with budgeting apps, but the principles are still the same. For me starting out this was a great way to understand where my money went.

I wasn’t taught these things by my parents and helped me to understand better. 

Can anyone use the envelope system?

Anyone can use the envelope system when starting out and learning how to budget for the first time. It gives a quick visual to the user about what their finances are at the moment and from week to week and month to month.

It also helps the user understand how categories work and how to divide your paycheck each week or pay period and plan accordingly.

Is the envelope system safe?

The envelope system is safe to a point. At the end of the day, like anything else, having this much cash on hand can be tempting to any thief. There is also the risk if there was a fire there would be no way to replace this lost income or have it insured.

The goal then is that once you learn the basics of budgeting and you gain more confidence in your abilities that you move your money into a bank account where it can be kept safe and insured. 

How Much Money Should I carry?

You should carry only what you need to cover that expense for the day. So, if you go grocery shopping then you should take the grocery envelope and only the grocery envelope to do your grocery shopping.

If you go over budget while shopping, then you will have to put an item or two back until you can cover the expense using only what is in the envelope.

What If I have Leftover Cash at the End of the Month?

If there is cash left over then that money can be used to pay down another debt like your credit cards or student loans or something else you have been saving up for like a car.

What If I Run Out of Cash in One of the Envelopes?

If you run out of cash in one of the envelopes the knee jerk reaction is to borrow from another envelope. You can do this, but it defeats the point of holding yourself accountable to your budget and your goals.

Why Cash Only?

There is an emotional connection when we use cash to purchase things for ourselves versus swiping a debit card and not seeing the money change hands.

Pros and Cons of the Envelope System


  • It’s an emotional and tangible connection when you physically use money to pay for a purchase.
  • Easier to save money 
  • No overdraft fees if you pay with cash


  • It’s difficult having that much money on hand in your apartment or house versus the safety of a bank.
  • It’s hard paying bills with cash only. I had to go to the grocery store or bank and buy money orders until later when I got a che
  • It can be inconvenient and time consuming when you are used to using a card.
  • Cash isn’t accepted everywhere as things slowly convert to a cashless society

Tips For Using the Envelope System

  1. Budget by paycheck average

Yes, you want to account for every dollar and make sure every dollar has a job, but when setting up your budget you may have a paycheck that is not consistently the same each week if it’s higher or lower week to week. So, what you want to do is average out your last four weeks’ pay checks when setting your budget. It may be wise to average down also until you get the hang of it when setting up your budget.

  1. Decide the rules beforehand

What are the rules for spending you and your spouse will have with each other? If you spend everything out a category do you borrow from another? Should you check in with your spouse if you need to spend more that week on something? My wife and I would check in with each other if either of us was going to spend over $50 on a purchase that wasn’t budgeted for.

  1. Use extra money to pay down debt

If you end up with extra money at the end of the month, consider using this to pay down your debt or to invest for your future. 

After the Envelope System (Growing Up)

After using the envelope system I became more confident and successfully paid off my credit cards on my own. I eventually went to the bank and opened up my first checking account.

I learned how to write checks and balance a checkbook instead of paying my bills with money orders. Then I got a debit card that drew directly from my checking account.

I learned how to keep a budget and track my expenses on my own and later make goals for myself so I could travel or save up for purchases.

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