Envelope budgeting, or cash stuffing, is a budgeting system where you allocate physical cash into envelopes for different spending categories, such as groceries, utilities, or gas.
It’s one of the simplest ways to stick to a budget, avoid overspending, and make sure you have enough for all your priorities, because you only spend what’s in each envelope.
Nowadays, you don’t always have to use real envelopes or cash. There are digital versions of this method that you can use on your phone. Apps like YNAB and Goodbudget let you create “virtual envelopes,” so you can track your spending without handling physical money.
If you are a beginner to budgeting, you might want to try this system too. In this article, you’ll learn how it works and how to do it step by step.
How Envelope Budgeting Works
How it works is super simple. First, you figure out how much money you want to spend on different things, like rent, groceries, and bills. Then you put that money into separate envelopes — this is the cash-stuffing part, where each envelope holds the money for a specific category.
The rule is you only spend what is in each envelope. Easy, right?
Now that you know how it works, it’s important to know how to do it.
Step-by-Step Guide to Starting Envelope Budgeting
1. Set a Budget Period
Choose a budgeting schedule that matches your income. Most people set their budget monthly, but you can adjust it to fit your pay schedule. For example, if you get paid every two weeks, set your budget for a biweekly period. If you get paid monthly, set your budget for a monthly period.
You might also like: How to Budget When You Get Paid Weekly
2. List and Categorize Expenses
Start by listing all your usual expenses. If you are already tracking your spending, you can easily tell which ones are your regular expenses. Focus first on the basic and important ones — you don’t need to create 20 categories to start.
For beginners, here are some common categories to start with:
Essential Expenses (Needs)
- Rent / Mortgage
- Groceries / Food
- Utilities (electricity, water, internet)
- Transport (gas, bus/train fares)
Savings or Financial Goals
- Emergency fund
- Debt repayment (if any)
- General savings
Lifestyle or Fun Money
- Entertainment (movies, eating out, subscriptions)
- Hobbies / Personal shopping
Occasional or Miscellaneous
- Gifts / Special occasions
- Small unexpected expenses
Remember, you don’t need a lot of categories when you’re just starting with this budgeting system. Begin with 5 to 10 envelopes, and once you get the hang of it, you can split your money into more categories.
3. Allocate Cash to Envelopes
Before you start putting cash in your envelopes, take a close look at your income and usual expenses — that way you’ll have a good idea of how much to put into each category. Decide what you need to allocate to each area, and then slap a label on the envelope with its name on it.
Next, allocate the cash by just dumping the agreed-upon amount into each envelope. Remember to allocate your essential needs first — like rent, groceries, and your bills — before you think about splurging on stuff for fun or things you simply want.
4. Spending and Tracking
Now it’s time to see if your cash-stuffing system actually works. When you need to pay for something, remember you can only use the cash from the specific envelope for that purpose.
For example, if you popped $500 into your grocery envelope, you can only spend up to $500, and then take the cash straight out of that envelope when you’re paying for your groceries.
And don’t forget to keep track of how much is left in each envelope by recording your expenses – it’ll help you keep on top of your finances.
5. Adjust and Replenish
Tracking your spending is essential to making the envelope method work. At the end of the month, review your envelopes:
- Did you overspend in any category? Figure out why and adjust next month.
- Did you have money left over? You can roll it over, save it, or treat yourself.
Then adjust your budget for next month based on what you learned. Increase the budget for categories you always run out of and reduce it for those you rarely use.
Traditional vs Digital Envelope System
Not a fan of keeping a lot of cash at home? Or maybe you live far from banks or stores, and carrying cash around feels like a hassle?
The good news is you don’t need to use real envelopes anymore. There are digital versions of the envelope system, like YNAB and Goodbudget, that let you divide your money into “virtual envelopes” on your phone. Many banks also have budgeting tools that work the same way.
A digital envelope system is safer and easier than carrying cash. You don’t have to worry about losing your money or having it stolen, and your funds stay protected in your bank account. You can also track everything right from your phone, which makes budgeting simple and organized.
If the idea of going cashless but still wanting a little hands-on control appeals to you, you might want to give a hybrid envelope system a go. This is just a fancy way of saying you keep money aside for the times when it’s still easiest to pay in cash – like when you’re popping out for some groceries or filling up the tank at the gas station. Then you can use your digital envelopes for everything else, leaving you free to enjoy the best of both worlds : a bit of hands-on control and a whole lot of digital convenience.
Wrapping it up
Envelope budgeting is a pretty simple but effective way to take charge of your money – whether you stick to cash, go digital, or a mix of both. The key is just to stay the course, track your spending and make adjustments as needed.
Even with this system, mistakes can happen, so it helps to learn from common pitfalls – see budgeting mistakes to avoid for tips to stay on track.