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What is Envelope Budgeting?

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  • Written By: Matt Brady
  • Edited By: Jenn Walker
  • Last Modified Date: 13 September 2016
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Envelope budgeting is a method used to maintain a personal budget. It's one of the simplest to set up and easiest to track. Envelope budgeting involves dividing a period of spending—usually a month—into various spending categories. According to one's monthly income, and how much savings is desired per month, each spending category is given a budget. This might include setting aside 100 US Dollars for eating out every month. Each spending category is then assigned an envelope, which is filled with the allocated amount of money at the beginning of the month. The envelopes help enforce a strict budget, ensuring that no spending category uses more money than it was alloted.

Envelope budgeting is easiest when each envelope is clearly marked with the spending category and the corresponding amount of money. This makes it easy to quickly flip through the envelopes, locate a spending category, and identify exactly how much money is available. When using the envelope budgeting method, it may be wise to store the envelopes in a secure place, as cash lying around in envelopes can make easy prey for would-be intruders.

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Traditional envelope budgeting hinges upon putting hard cash into envelopes. With the many people who receive paychecks per month, this may be a difficult transition at first. In time, however, it can become habitual and easy to cash out enough of a paycheck with which to fill budgeting envelopes. Engendering the habit of relying only on envelope cash can also help wean a spender off of using a credit or debit card too liberally. Using this method, only the exact amount of money allocated in budgeting envelopes may be spent.

With sophisticated financial software, envelope budgeting is now possible even without the use of cash. By linking a bank account with one of the many financial software tools available, a spender can track how much money is flowing in and out of a bank account and on what that money was spent. Users can either create their own spending categories or rely upon boilerplate categories provided by the financial service.

Financial software packages can be bought, but one can also rely upon one of many free online services. Don't be fooled into thinking that because some services are free that they're less reliable; ardent financial enthusiasts and software developers have made free online services very competitive and reliable. There are security trade-offs here, though. Some feel that electronic envelope budgeting is more secure—there isn't the hassle and risk of free-floating cash—but it does require users to share their account information. Financial services are extremely capable of and careful to protect your financial information, but there are always risks involved when sharing account information.

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