Expert Q&A

Building a better envelope budgeting system


With a few refinements and simplifications, this old cash-based system still works, says our expert

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Question for the expert

Dear New Frugal You,
I’ve always had a problem with the “envelope method” of budgeting. It seems difficult to manage unless you’re using the money all at once, like spending all of your $100 food budget on one big shopping trip. What about the mixed items? For example, suppose I go to the grocery store and buy three apples, a newspaper, toothpaste and a dog toy. I pay with a $20 bill from the food envelope. Those four items should come out of four envelopes — my food, reading, health/beauty and pet categories — but I don’t have all the envelopes with me and it would be cumbersome to maneuver all of them at the cash register and pay for one thing at a time from the correct envelope. The change from my $20 goes back into the food envelope. Now I must go home and take out the right amounts from the other three envelopes and add them to the food envelope.

How do people really do this on a day-to-day basis and keep the categories straight? Thanks for any advice! — Jessie in South Dakota

Answer for the expert

Dear Jessie,
You’ve pointed out some of the biggest challenges in using the ‘envelope system’ for budgeting. It was developed in a simpler, slower time and can be cumbersome to use.

Let’s take a moment to review what the envelope system is (for those who might be unfamiliar with it). No one knows exactly who the first person was to use an envelope system, but it began when cash was king, before everyone had credit and debit cards.

The idea was that you would have an envelope for each category of your expenses. Each payday, you’d put money into the various envelopes based on what you expected to spend on that category until your next payday. When the money in the envelope was gone, you had no choice but to quit spending or steal money from another envelope. It was a quick way to keep your spending on track — budgeting without all the math!

The first thing you’ll want to consider is the number of categories within your budget. Many budgets fail because they have too many categories. Remember that a budget or envelope system is a tool to help you understand where your money is going and what you can do to control expenses.

That tool should help you identify problems, not bury you in needless information. One way to avoid that problem is to have fewer categories. For most families, eight categories will do the job.

  • Taxes.
  • Housing/utilities.
  • Auto/transportation.
  • Food.
  • Medical/insurance.
  • Entertainment/recreational/clothing.
  • Savings/investment/charitable contributions.
  • Miscellaneous.

Suppose your reading expenses got out of hand. How would you find it? You’d begin by noticing that your “entertainment” category seemed too high. Taking a look at the receipts in that category you’d find that you were buying too many books.

The key is that you have the data available if you need it, but you’re not overwhelmed tracking it.

OK, so now that we know what we’re trying to accomplish let’s figure out the best way to do it.

To get a cash/envelope system to work, you’ll need to limit yourself to no more than eight to 10 envelopes. Instead of moving money, try keeping a slip in each envelope. On it, list items that were purchased from other categories with money from that envelope. Don’t worry about moving money from one envelope to another until you get to the end of the month or the envelope runs out of money. Admittedly, that’s still cumbersome, but it’s much better than moving $1.59 every time you buy a chew toy at the grocery store.

One other helpful trick is to select your categories based on how you shop. If you tend to buy cleaning supplies at the grocery store, consider them to be a food rather than a household item. Remember that the goal isn’t to be perfect in getting each item into the proper category. Rather, it’s to be able to find out where you can reduce spending.

The key is to remember that the goal is to make it easy to control your spending and to help you notice when something is wrong, not to collect a bunch of nice-looking data.


See related: Living on a bare-bones budget, Trying to cut back on spending? Go BIG!

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