Sense & Centsibility Blog

Do Envelope Budget System's Work?

lending money

Anyone that reads our blog knows that I am a very honest writer. I always say pros and cons and of course if something worked for me and my family.  I was chatting with a friend recently and she told me that she paid of all of her debt (besides her mortgage) by using an envelope budgeting system. First, I congratulated her because I can't imagine being debt free. And second, I asked her HOW exactly she did this!  After chatting with her I decided to do a little research and here are my thoughts on the whole system.

Esentially an envelope system is where you have a different envelope for each of your flexible expenses. You put cash in the envelope based on your monthly expense and only spend what you have budgeted each month. The biggest con and hardest part about an envelope budget is having cash, getting cash and using cash. I swear I couldn't survive without my debit card. And if I do get cash I typically spend it before it gets too comfy in my wallet!  If I did this plan I would have to actually drive to the bank and take money out. Can you imagine?!?

I would say the best part about the envelope budget system is accountability. You are living on a cash basis so you will be aware of every penny you spend. You will be organized and very aware of expenses. Debit cards can be dangerous because people don't feel any 'guilt' when they use them like the would with cold, hard cash.

How Does it Work?

The goal of a successful envelope budget system is to determine the right amount to save monthly, while making sure your expenses and debt payments are less than net income – so you have a balanced budget. Create a written list of all the things you spend money on and then divide the list into three categories. This is a great way to get organized and regain financial control. Listed below are the steps to take to implement an envelope budgeting system:

Step 1: Get Organized

Add up all your monthly expenses by looking at what you spent in past months. Expenses can be broken into 3 types. Not every expense can fit into an envelope, literally. If you are like me you pay a lot of bills online. The real spending categories that you should use are flexile expenses like groceries, clothes, babysitter, gifts, etc.


Step 2: Gather Envelopes

Write the name of the expense and monthly amount budgeted on the outside of the envelope and put the cash inside. For example, "groceries $400" or "gifts $50." Use only the amount of cash from the envelope to pay for the intended purchase. Some categories may not be used every gifts or vacation. Carry the money over to the next month so it can build up. Note: I have 2 small kids so I have to pay-at-the-pump with my kids. I could never take them into the gas station. So I would not use an envelope for gas.

Step 3: Stop Spending once the Envelope is Empty

This will not work if you cheat. Don't spend if you don't have the money in the envelope. There may be special cases (an emergency) where you need to take money from an envelope, like 'babysitter' to pay for something else. Say a school expense comes up or your furnace breaks. Hold yourself accountable.

Step 4: Modify Budget Amounts

This is a work in progress. Do you consistantly have money left over in a category? Like groceries? If yes, revise your budget and the amount for the next month.

The keys to success with an envelope system is careful planning, realistic amounts and controlling the urge to use funds planned for another category or expense. I really do recommend giving this a try. Or at least variation. You might be suprised by the results.

At LSS our counselors are here to help you achieve your financial goals. They will create an action plan for you to stick to your budget, save money, and conquer your debt. Call us today at 888.577.2227 or get started online now. Don’t wait to improve your financial situation – take action today!

Author Kate Swenson is a Project Manager at LSS Financial Counseling.