Budgeting with envelopes is the ideal system for people who are spending too much money but can’t hack budgeting from a spreadsheet or a document.

I know I know – who doesn’t love a spreadsheet, right?  Oh… quite a lot of you?  *crawls back into box*

Some people may also find the envelope system useful if they have set a budget but can’t stick to it.

In other words, it can help if you’re a bit short on will power…

What is budgeting with envelopes?

Simply put, the envelope system is a way of controlling the amount of money you spend on different things so that you don’t overspend or bust your budget.

You only spend cash with the envelope system.

When each paycheck comes in, you decide how much money you are going to spend on your groceries, travel, social life etc, and then you get the money out and put it in an envelope with that item written on the front.

You leave your cards at home and spend the money in the envelopes ONLY on the thing that it is meant for.

When the envelope runs out, you stop spending on that item.  So you’ve got to make it last!

The envelope system is a very quick way of finding out where you are able to stay on budget and where you are constantly burning through the moulah – food is usually a guilty culprit…

It may sound like a return to the dark ages…  But if you are constantly overspending every month, perhaps going a bit medieval is what it takes to get your finances on track.

Budgeting with envelopes

How does budgeting with envelopes work?

If you already have a budget in place, then you are half way there.  Simply get out the cash for all your budget categories and put it in envelopes.

If budgeting gives you the fear of god, a good place to start is the 50 30 20 rule.

This rule says that you should spend around 50% of your take home income on things you need (rent/ bills/ utilities etc), 30% on things you want (fun money, eating out, luxury goods) and 20% on sensible money goals like saving, pension contributions etc.

When it comes to regular monthly bills, you don’t need to pay these in cash.  Most people’s bills are taken directly from their bank account.

Just treat your bills account like an envelope you don’t touch.  Put the money for the bills in there and leave it alone.  Leave your debit card for that account at home, so you can’t be tempted to dip into it.

Envelope system step 1:  Work out how much money you’ve got to spend (your 30%)

After you pay for the vital things in life  – the roof over your head, health insurance, heating, water etc, what have you got left to spend?

If you put around 20% of that towards savings or pension, what do you have left?

That amount is your spending money.

Budgeting with envelopes

Envelope system step 2: Work out how you’re going to spend it

What will you spend on:

  • groceries (above and beyond the basics)
  • social life
  • eating or drinking out
  • gifts
  • travel
  • appearance
  • clothes
  • stationery
  • other personal items

Have a little twizzle with the numbers until it all adds up and seems reasonable to you.

(Remember if it’s not quite right you can tweak it next month.)

Budgeting with envelopes

Envelope system step 3:  Get some envelopes and write what they are for on them.

Then put in the cash you have budgeted for each category.

These clasp envelopes from Amazon can be used again and again.  (This image will take you to amazon and is an affiliate link.  If you chose to purchase them, I earn about ten cents, which will make me feel happy.)

Envelope system step 4: Spend only what is in the envelopes on the category until you get paid again or the envelope runs out…

…whichever happens first!

This is the hard bit.  But at least you can see how much money you have just from peeking into your envelope.  It should help you think twice before buying any unnecessary things that you want but don’t need or can’t afford.


What if I have no idea how much money to put in the envelopes?

The whole point of the envelope system is to only spend money that you have.  So you need to know how much money you have each month or fortnight, and then knock off the amount you’ll need in your bank account to pay bills.

After that you just need to divide up the rest into categories.

If you don’t have a clue how to divide it up, try looking over a bank statement to see what you typically spend.

If that’s too much effort, try using a budgeting app like Money Dashboard or Mint.  After around 4 weeks you should start to build up a picture of how much of your money goes on the main spending categories.


Advantages of budgeting with envelopes

  1. Sometimes the simplest solutions are the best. The envelope system works and it’s easier than tracking your money on a spreadsheet.
  2. It makes it hard to overspend
  3. It keeps your budget to the top of your mind. You have heightened awareness of what you can spend and it reminds you to not blow your money unnecessarily.
  4. You can’t spend it if you don’t have access to it.
  5. It can give you a new insight into where your money goes. Small expenses here and there can break a budget.  Direct debits you didn’t know about, gifts for children’s parties.  It all adds up but if you know about it, you can adjust other spends to make room for it.
  6. Cash is psychologically harder to fritter than money you can’t see. You’re less likely to spend wastefully when you see the money disappearing before your very eyes. In fact, people spend 10% to 15% less when using cash.
  7. You’re less likely to build up extra debts from mindless card spending, and you are less likely to get charged for going overdrawn.


Disadvantages of budgeting with envelopes

  1. It’s less convenient. Plastic is easy and you have to go an ATM to get the money out every time you get paid.
  2. If you are budgeting as a family, you might not be able to get your partner on board.
  3. It might take a bit of getting used to.
  4. You don’t earn interest.
  5. You don’t earn rewards.
  6. If you lose the cash it’s gone forever.

Budgeting with envelopes

Envelope system tips and FAQs


Duh Amazon?  How can I pay for that with cash?

This is where the envelope system slightly falls down. If you need to source a lot of things online, paying cash isn’t really viable.

There are still ways you can make it work though.

If you just make one or two purchases here and there, just budget for it in your bills account and make sure you only buy things you’ve accounted for.

Another idea is to have a spending account just for your online expenses with someone like Monzo or Revolut.  You can easily see what’s in your account and get notified of your balance on your phone every time you spend.  Plus you can’t spend once the money has run out: you have to top up – so it forces you to stick to your budget.


What happens when the cash envelope runs out?

Well the IDEA of the system is to only spend what’s in the envelope and not to borrow from other envelopes – so you are meant to be sticking to that budget and not blowing it.

However, the reality of it is that we need to eat and get to places.

The first thing to work out is if you can cut back.

So you’ve blown all your grocery money and you’ve got a few days until you get paid.  What’s in the cupboard?  There are usually a ton of tins of things you can get creative with.  Can you eat pasta with a little olive oil or make a sauce with garlic and tinned tomatoes?

What about travel?  If you’ve blown your travel money can you postpone any trips you’ve planned.  Is there anyone else you can share a lift to work with?  Can you use coupons to get cheap coach or train travel? Can you walk?!

If you can’t make cutbacks, then you’ll have to either borrow from another envelope or dip into your savings/ emergency fund this time.

So review your budget the next month.  Maybe you were a bit unrealistic and need to rethink how much you need for things.

Don’t be disheartened, rejig the amounts and try again.

All budgeting is a trial and error process.

Budgeting with envelopes

Left over money in the envelope….

Hahahahhahahaaa!  Left over money in the envelope at the end of the month?

If anyone has some, please comment below. You are a rare and amazing beast!

IF you DO have left over money at the bottom of the envelope by the time payday rolls along, then you can do one of two things:

  1. Reward yourself – you did well! Allow yourself a little spendy splurge with what you have left.
  2. Put it towards your savings or finance goals. Which is actually also a reward to yourself even if it doesn’t look like much like a glass of fizz.

I get paid every two weeks, now what?

When you budget you should do it for the month – as a lot of expenses are monthly.  But fill your envelopes by the paycheck.


I got it all wrong and ran out of grocery money way before my next pay came through.

Tweak the budget.  Don’t despair.  Part of the process is finding out where you are burning through your cash.

You can do one or both of two things:

  • Increase your budget
  • Work out ways of cutting down your spending for next month e.g. menu planning.


What budget categories should I have?

Well it depends what you tend to spend your money on – popular ones would be groceries, travel, social life, children.  Check out the ultimate guide to budgeting for more detail.


Final thoughts

Don’t knock it if it works, don’t knock yourself if it doesn’t

Budgeting with envelopes isn’t the most convenient way to budget – not when you compare it to the ease of cards.

There may be a gazillion reasons why it doesn’t work out for you.

But if you see any benefits at all to using it and you are trying to stay on budget, forgive yourself if it takes a while to get it right, and give it another go.

Remember if it has reduced your spending AT ALL that is a mini victory!

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Budgeting with envelopes