Your budget: envelopes or a plan?


When I was first introduced to budgeting, the model used was the envelope method. Every payday you'd take your cash and divide it up among envelopes labeled "Rent," "Groceries," "Electric Bill," etc. Then, when it was time to shop for groceries or pay a bill, you'd take the money out of that envelope.

Just to be clear, even I'm not old enough that anyone I knew ever used actual envelopes. We'd keep the money in a money market fund or savings account (nowadays probably an internet savings account), and use a spreadsheet (or paper) to keep track of the categories. But the model was envelopes.

The envelope method works especially well with occasional or irregular expenses like annual insurance bills or car repairs. You put, say, $52 every month into the "Car maintenance" envelope. Every three months you pull out enough for an oil change, letting the rest accumulate against the day when you need new CV joint boots or a new timing belt. There's the danger that you'd need a new muffler right after you start budgeting, long before you've accumulated the money for it--but you'd have had the same problem even if you hadn't started budgeting.

So, that's the model I used when I first started budgeting: I set aside a certain amount of money out of each paycheck for each category.

Some years back, I used Quicken for a while, and found myself frustrated by the software's budgeting functionality. Following the envelope method to smooth out the occasional big bill didn't work the way I wanted: My "car insurance" line would show up as way under budget month after month, and then show up as way over budget the money I actually paid the insurance bill. More recent versions of Quicken partially solved the problem by letting you indicate exactly when a line item is due, so you can put in an annual bill, and then Quicken will show you the monthly average, but it still didn't do what I wanted for the situation where you wanted the budget to show gradual accumulation against an unpredictible event.

Partly because of that experience, though, I've found my mental model of budgets has changed. I don't see a budget as a bunch of envelopes, each with the money for some category of expenses. I see a budget now as a plan, with a pool of money to support my plan as a whole.

For one thing, this solves the problem of that unexpected muffler expense: You add the item to your plan and you readjust other line items as needed to bring your spending in line with your resources. The money comes out of the pool of money that you've got--which is just what you'd have done with the envelope method as well, but now you're not having to raid all those envelopes for spare cash. In the budget itself, you note the actual expense in the month you pay for it and deduct that money from the balance that remains available this year, and then evaluate where you are in terms of the budget. Maybe you're still on track, or maybe this expense suggests that your budget was overly optimistic. If your best estimate says to adjust the budget, do so.

The advantage of this mental model--the budget as a plan--is that a plan is what it really is. It's not just a bunch of categories with dollar amounts attached. Like any plan, it needs to change as reality intrudes--and as your hopes and aspirations change, but even as it changes, it remains a plan.

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Guest's picture

I haven't ever tried the envelopes plan, but I do know that it is quite effective after a few months of getting used to it.

It works exactly the same as the mental plan you described. When you have a muffler expense, you pull from other envelopes like eating out, or entertainment. After my July Cash only experiment, I think that we will give the envelopes a try as an experiment. If only for learning purposes, I still think it will be interesting.

With envelopes the main point is that if you only have $100 at the grocery store you only spend $100, versus spending $120 and adjusting. It is still flexible enough that if you 'need' to spend $120, you can

I know the Mvelopes is a budget software designed specifically for the envelopes system. Haven't tried it though.

For now I will stick with transferring money to and from a barrage of ING savings accounts.

Philip Brewer's picture

Most people probably should experiment with different budgeting strategies, and then go with whatever seems to work best . In the end you still have money flowing in and money flowing out and what matters is whether you can look back and feel that the process you used helped you make wise choices.

Guest's picture

We use the envelope system per Dave Ramsey's financial peace university lessons.

Yes, we use actual envelopes. No, its not difficult or complicated, and doesn't require a bunch of transfers between accounts. Our credit union is nearby so getting the cash is a quick errand.

This has been a great system in our house as it greatly reduces spending tendencies, and makes us carefully consider our purchases.

Guest's picture

How can i get ahead on my envelopes if i have to go in to one to pay another. please help

Guest's picture

I do use quicken with a "virtual" envelope system. I created a mock acccount called "escrow" and I put the budgeted amounts into it each month. When I need it to pay a bill, I put it back in the real account. In reality, the money is in my checking account all along, but it is not all thrown in together. When I have a large balance accumulated, I transfer it to my ING account to earn a little interest (some of the big bills are only once a year, like property taxes on my house). I wouldn't like all the cash sitting around my house doing the regular envelope system.

Guest's picture

My husband and I started on the Dave Ramsey program a few months ago. Rather than using the plain envelopes - I made these cool individual "designer" envelopes. I just like having something with a little personality. These things work great. If you are interested - check out my Ebay and Etsy sites.

Guest's picture

We've tried many times to develop and then stick with a budget. It always falls apart. While my significant other is exceptional in many areas, when it comes to numbers on a piece of paper, he sees them as graphic designs. On the other hand, dollar bills in an envelope are tangible. We've created envelopes for our problem areas: food and recreation. We also have an envelope for carpooling because we need cash. Now, no matter how abstract $20 may be on paper, when there are no more $20s in the food envelope, food buying must stop.

This method does work better for us... but now I've got to problem solve how to get a month's worth of cash out at one time (ATM won't give that much) when our wonderful credit union is not nearby and is not open during the hours we can get there :(

Guest's picture

Won't your credit union up your withdrawal limit if you ask them? Typically most banks/credit units cap you out at 300 dollars per day in ATM transactions as a default setting, but you can request a higher limit if a higher limit is what meets your needs.

Guest's picture

We have been using Mvelopes for about 2 years now, and it works great! What it does is use the cash envelope system, but it's an online system. You create folders or "envelopes" when you get your paycheck, so you only spend what you already have, instead of spending what you anticipate you have. It syncs with your bank accounts so all your transactions come out of your "funded envelopes".

You have to keep up with it by logging all your transactions, but it helps being able to track all your spending, so you can create reports about what you've spent vs. your budget and be able to analyze it. We rarely have overdraft fees (and we had a lot when we used Quicken).

You do have to be disciplined to "consult" Emvelopes when you want to spend, instead of just looking at your account balance. It also has a mobile based program so you can consult it from your phone or your PDA.

Here's the link:

We love it!

Guest's picture

the cash only envelope system rocks.

my husband's company went bankrupt 3 months ago. glad we were on the cash only budget plan before it happened.
he still hasn't found a job - but we are surviving because of god's mercy and the purging of those nasty credit cards!
the cash only envelopes really work in our household.
here is a cool website that makes "designer cash enveloples"

Guest's picture

I actually use an envelope-type system that I designed in Excel and which is perfectly adapted to my needs. Mostly the "envelopes" are just virtual spending categories, but for a couple of them I put actual envelopes in my wallet.

These are the categories that I need to put closer control on. In my case, groceries and gas for the car and food out are they.

The catch here is that there isn't necessarily any cash in the envelopes! Instead, what I do is that on the "Food--Groceries" envelope I write the weekly cash allocation on the outside by the upper left corner. When I'm at the store, I can pull my wallet, look on the envelope and see: oh, I have only $21.36 left for groceries until the 10th of December! Better keep that in mind while I'm selecting stuff! Then whenever I spend on the groceries, (using a credit card, cash, or whatever payment I feel like), I write the amount on the outside of the envelope and bring the remaining balance down. And don't go over the budget without making a conscious decision to.

This is basically just a way for me to keep a closer eye on certain categories by having my available budgeted allocation figures right there in my wallet where I can see them at the store. It prevents unmindful overspending.

When I get home, I enter them into my excel sheet, but really for some categories I need to know what I've budgeted right in my wallet, which won't fit the whole budget plan.

I trim the tops of the envelopes off so they are the same height as US paper currency and will fit in my wallet and put the budget amount on the outside of the envelope.

I tend to cut up envelopes that came in with junk mail for this purpose. For those I also trim them by length, cutting off the right side of the envelope so it's only sealed on the bottom and the left edge. It actually makes it easier to slip cash in and out of when done like that.

Occasionally I'll even use the envelope to store cash or receipts, but the guideline I go by is the number on the outside of the envelope, not the cash in the envelope.

Guest's picture

I have used this for years for the household accounts ( except utilities). I always manage to save something extra at the end of each month. My last budget folder has been taped on the envelope edges and tops at least twice to get more service, since the store I got them from has gone under. The bottom point is that it does work!

Philip Brewer's picture

Putting your money into envelopes only does one thing:  It sets off an alarm when you're spending too much money.  The "alarm" is having to dip into other envelopes to cover your expenses. 

That's really all you can expect of envelopes--they don't automatically cure overspending.  You have to do that.

I've written several articles that are more on that topic. Emergency belt-tightening talks about ways to cut your spending right away.  I also wrote one (aimed at people who had lost their job and had trouble finding another) with tips for making longer-term spending cuts.

Guest's picture

Hi, this is steve from comment #9, where I described by "envelope-style" budgeting system with Excel.

Hey guess what, I discovered that it's very easy for me to fall off the wagon using such a complicated method.

I've been using actual cash in envelopes for the past couple months and I've noticed a couple of things great about it:

1) my spending is on target, not over

2) I'm so used to going for the envelopes to buy things and looking in to them to see the remaining monthly purchasing power that I've pretty much de-trained myself away from even *thinking* of my credit card or debit card when making a purchase. Using the credit card (I actually almost never use the debit card as I don't like them)feels unusual now and I only do it for gas or an unusual expense.

using the cash envelope system has decoupled the idea of spending from being associated with a plastic card. This is a very good thing in my short 2 months' experience.

And I kind of like carrying around the cash. I thought I was a sophisticated guy but I've realized keeping it a lot simpler works better, which is the goal.

Also I spend less time budgeting etc or even thinking about money. I pretty much only deal with money stuff once a month, to allocate money to my envelopes and set up my automated electronic payments of bills.

Guest's picture

one last thing I noticed from my last post:

my ability to discipline myself and not buy things has increased under the cash envelope system. Somehow seeing that I have $x of cash is more meaningful to me motivationally than the more abstract budget numbers I was using before. Now I've actually put things back on the shelf when out shopping when I realized I was getting close to running out of cash. Running out of cash is just so more immediate than the more abstract "hey I'm over my budget allocation for food now!."

Guest's picture

I have experimented with different systems and I find that the actual envelope system works for me. They are much more tangible and felt so I really do make an effort to push through with my budget.

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