Creating and using a budget is a critical step in your financial journey.
A budget is a plan for how you’ll spend the money you earn. Without a budget, it’s easy to overspend, create debt, and find yourself facing a ton of other financial problems. But when you take the time to map out your financial priorities in advance, it can help set you up for success.
One popular budgeting system that many people use is envelope budgeting. Envelope budgeting is a simple strategy that may help you control your spending by giving a job to every dollar you earn. You can use this budgeting system with physical envelopes or more modern digital budgeting apps.
Read more: Your complete guide to budgeting for 2025
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Envelope budgeting is a type of zero-based budgeting system that places special attention on the variable expenses within your monthly budget. After you pay fixed, recurring expenses (such as mortgage or rent, loan payments, and insurance premiums), envelope budgeting can be a helpful strategy to help you stay organized with other fluctuating monthly expenses like:
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Gas
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Groceries
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Dining
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Subscriptions
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Entertainment
Read more: Fixed vs. variable expenses: Key differences and how to budget for each
With envelope budgeting, each variable budget category gets its own envelope and a certain dollar amount assigned to it. For example, you might set aside $400 per month in an envelope for household groceries, $150 for dining, $200 for gas, etc.
Some people opt to use physical cash and envelopes when they set aside the money for their monthly spending categories. Others prefer a digital envelope budgeting approach, using budgeting apps such as Goodbudget or RealBudget to help them track their monthly variable spending instead.
In either scenario, envelope budgeting can work well for those who enjoy a visual overview of how they spend their money. Once you spend the money you set aside in a given budget category (like entertainment), you don’t allow yourself to spend any more money on those types of expenses until the following month. You can also challenge yourself to spend less in certain categories than you planned and apply the leftover money toward debt elimination, building an emergency fund, something fun, or all of the above.
Read more: Guide to zero-based budgeting
When it comes to budgeting, there’s no one-size-fits-all approach that works for everyone. The key is to create a plan for your money that’s easy to follow with consistency.
Still, there are some elements of the envelope system that work better for certain personality types compared to traditional budgeting. For example, if you’re someone who frequently overspends in certain areas (e.g., dining, groceries, entertainment, clothing, etc.), an envelope budgeting system might be a great solution for this problem.
On the other hand, if the idea of tracking every dollar and setting up specific categories each month seems tedious, envelope budgeting might not be the ideal fit for you. Instead, a traditional budget (income minus expenses) or a proportional budget like the 50/30/20 budget might work better for your situation instead.
Read more: Struggle with budgeting? Following the 50/30/20 rule could be your solution.
Let’s assume you and your partner have a combined budget of $1,500 in cash left over to cover variable household expenses after you pay your fixed monthly bills (including savings). Here is a simple example of the envelope budgeting system in action and how you might split the cash between different spending categories:
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Groceries: $700
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Gas: $300
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Dining: $200
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Subscriptions: $100
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Entertainment: $100
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Clothing: $50
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Beauty/Grooming: $50
Once you figure out how much money you want to assign to each spending category, it’s time to split your cash between your budgeting envelopes. You can complete this step digitally and leave your cash in an interest-bearing account. Or, if you’re opting for the cash envelope approach, you’ll want to visit your bank and withdraw the cash to place in each envelope.
If you do opt to use physical cash envelopes, it’s wise to only carry the cash you need with you at a given time. Otherwise, store your cash at home in a safe and secure location where it will be less vulnerable to theft or loss. (But know that your money won’t be eligible to earn interest like it might if the cash was sitting in a high-interest savings account or some other interest-earning deposit account.)
Read more: How much cash should I have on hand?
Using the envelope budgeting system (digital or physical) could be a good way to gain control over your spending. But before you try this type of budgeting method, it’s wise to consider the benefits and drawbacks:
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Digital envelope budgeting can work well for visual learners.
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The budgeting system is simple and easy to follow — for individuals, couples, and households.
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For many people, envelope budgeting makes it easier to stay disciplined and stick to monthly financial goals.
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Cash envelopes could help you avoid overdraft charges and credit card debt if you’ve been struggling with these types of financial problems.
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If you lose cash envelopes, there’s often no way to recover your lost money.
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Cash envelopes don’t earn interest.
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It can be difficult to budget with a partner using cash envelopes. (Note: Digital envelope budgeting solves this problem.)
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There can be a temptation to spend money from other cash or digital cash envelopes.
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Cash envelopes can be challenging to use in a modern world with online shopping. (Note: Digital envelope budgeting solves this problem.)
The envelope budgeting system is a simple approach to money management that could help you make better financial choices. While this budgeting method may not be the right fit for everyone, many people enjoy the control it offers over their finances without being overly complicated.
