What is the Envelope Budgeting System?
This post originally appeared on healyoursoul.net on 5/6/17.

We have struggled with budgeting for over a year now. Before that, we didn’t even HAVE a budget! *Gasp!* I know, I know. In the past, people have tried to teach me the importance of a budget, but I just didn’t get it. But then I lost my job, thought I knew what the heck I was doing (I totally didn’t), worked on building an MLM business (I failed, hard), and sold off all the mutual funds that had been invested for me through my childhood to pay for our daily life + way too many Disney vacations (the call of the Disney annual pass is REAL, and very dangerous). But see, the thing is, I was living in a poverty mindset. The mindset that the money would eventually run out, so I wanted to use it all up while I still had it. Not very wise, is it?

While you may not have this exact scenario (hopefully you aren’t quite as unwise as me, but if you are, there is hope!), but maybe you can relate to even a little bit of that story. Maybe you are just struggling to stick with a budget. Maybe you just lost a job and are trying to reduce spending to get by until you find a new job. Maybe you are a new mom who desperately wants to stay home with her child. Maybe you are working on paying off your debt. Whatever the scenario, if you are looking to reduce spending, the envelope system is a great place to start (or start again).

I had heard about the envelope system, but didn’t really know how it worked. I mean, I knew it involved putting money in envelopes, but I didn’t know much beyond that. When we really decided that paying off debt was a priority though, and realized we were completely incapable of monitoring our purchases and curbing our spending when we reached our preset budget limits, I decided to look into the envelope system more. We have now been using the envelope system for 2 months, and I have to tell you, it is a game changer! Below are the simple steps we followed to get our system set up.
*If you would prefer an electronic version, you should check out the EveryDollar app, by Dave Ramsey. It is very similar to the physical envelope system, but does require more self-control, and still needs to be constantly updated every time you make a purchase. For those like me, the physical envelopes may be a better way to start.
1. Analyze previous months

This step is much easier if you have made all of your purchases using a debit or credit card. My advice is to analyze it month by month, for at least the past 3 months. You will need to first determine which categories you will use. For us we had the following:

  • Rent/Mortgage
  • Daycare
  • Storage
  • Car Loan
  • Car Insurance
  • Credit Cards (2 cards)
  • Health Subscriptions (Beachbody On Demand, Shakeology, Gym)
  • Electric
  • Cell Phone
  • Entertainment Subscriptions (Netflix, Busch Gardens, Audible, WWE, PlayStation)
  • Cable/Internet
  • Gas for cars
  • Groceries
  • Household Items
  • Entertainment (non-subscription related)
  • Fast Food/Restaurants
  • Doctors/RX
  • Savings
  • Student Loan
  • Medical Bills
  • Donations/Tithing
  • Miscellaneous


You might have more or less than us, and that is ok. You may find items that are unnecessary, like we did. The point of this exercise is to see how much money is going to each category.


2. What can be eliminated?

Once you have determined the categories, and how much has been going to each category each month for the past few months, you will need to go through each category and see what you are willing to cut. For us, it helped to ask ourselves three simple questions.

  1. “Is this bringing us joy?”
  2. “Is this necessary?”
  3. “Is this creating income – or does it have the potential to do so in the foreseeable future?”


Asking those questions helped us to eliminate cable, gym, and Busch Gardens. Everyone is different, but cutting things like cable, gym, and other entertainment related monthly expenses is usually an easy way to reduce your monthly budget. In my opinion, cable is over-rated, and with subscriptions like Hulu and Netflix, cable is becoming more obsolete. Even live TV subscriptions like PlayStation TV, Sling TV, and now YouTube Live, it is easy to at least reduce your TV spending, if not eliminate it completely. Gym memberships are another easy thing to eliminate, in my opinion. You can usually order a workout DVD or program for the same price as one month of your gym membership, or YouTube has tons of free workouts available too.


3. Determine your budget-busters

What categories are causing you to go into the red? For us, it was entertainment, fast food/restaurants, and miscellaneous. Now that you have cut out the categories that aren’t necessary, aren’t creating income, and aren’t bringing you joy, you need to ask yourself whether spending so much on these budget-busting categories is bringing you joy either. Spending on entertainment might be fun in the short-run, but is the short-term fun worth the long-term anxiety of living under a mountain of debt or going into the red each month? Probably not. Also, are you eating out so often just for fun, or is there a different reason? For us, we were grabbing something to eat when we were out and about, or just too lazy to cook. Keeping quick and cheap alternatives, while not always healthy, has helped to significantly reduce what we spend on that category. I will keep a couple granola bars in my purse in case our errands run longer than expected, and we always have ramen noodles on hand if we need something quick when we get home. We also keep cereal and almond milk on hand for our son, who doesn’t eat pasta. And don’t judge yourself too harshly on what you keep on hand. Remember these are items for a quick meal, not for eating all the time. On that same token, you don’t need to keep a ton of items on hand for “emergencies”. Two to four packs of ramen should be more than enough for this, depending on how many people are in your family. For more on how to eliminate the cabinet clutter, keep an eye out for a future blog post addressing that concern. I will show you how we cut our weekly grocery budget nearly in half!


4. Income vs. Expenses

Determine what categories are unavoidable, and unchangeable. This would be things like rent/mortgage (unless you are willing and able to move to a more affordable option), electricity (check with your electric company to see if there are ways to reduce your cost, or make the cost consistent over each month), childcare (if you need it in order to work, and it is costing you less than what you or your husband make), loans & credit cards, car insurance (contact your insurance company to see if there are ways to reduce your cost; can you live on one car alone?), tithing (if that is something you believe in doing). Notice I did not include food, household items, or gas in there. While food and things like toilet paper are necessary to survive (toilet paper isn’t necessary for survival, but is pretty darn desirable), the actual amount you spend on these items can vary greatly, so this should be put under luxury items instead. After you determine what is necessary, add that up, and also determine how much income you bring home each month. For us, I prefer to do this after tax, benefits, etc, because those amounts aren’t going to change, and unless you are doing this during your open enrollment period, none of these can be reduced either. Subtract your expenses from your income, and this will give you the total of what you can distribute to the other categories.


5. Determine how much for each envelope

How much will you be dedicating to savings, food, entertainment, etc, each month? This is when you will need to go back and reference what was previously spent on each of these categories. That doesn’t mean you need to keep it the same. In fact, you want to try to reduce these categories as much as possible, but you will still need to be realistic so you don’t set yourself up for failure. Do you really need to be spending $120/week on groceries? Well, it depends on how many people are in your family. If there are six of you, that is probably a very reasonable target. But if there are only two of you, you should be able to reduce that significantly. You also want to determine which items are taken out by direct debit, such as an Audible subscription, storage payments, etc. *Side note: you should not need to have a storage payment. This is something we want to get rid of, but my husband wants to significantly reduce the clutter in our house before we work on our storage unit. I feel like this is a backwards way of doing it, but I understand where he is coming from, and I want to honor my husband, so we are doing it his way. If you have a storage unit, and you don’t get in there on a regular basis (like once a month or more), then you should probably just sell whatever is in there. If you have a few sentimental items, maybe you could sell a few things in your house to make room for the sentimental items that bring you joy.


6. Create and fill envelopes

I found that the easiest way for us, without buying anything new, is to use actual envelopes for this part. Some people will suggest you buy a small folder, like this one, to keep in your purse and keep things separate. It may be less embarrassing to some people, but I was more worried about not wasting money, and I’m not embarrassed that I am trying to live responsibly, so we use the envelopes we already had. I wrote the name of each category on the front of the envelopes, along with how much we are allocating to that category. 

Then, when we got our first paycheck of the month, we took out anything that was not taken out of our accounts automatically, split the cash up accordingly, and put it into the respective envelopes. Since the envelope system was my idea, and my husband was nervous about trying it, I gave him control of the envelopes. In the end, they found a place near our front door which makes it convenient to grab when we are on our way out to run errands.


7. Stick to the envelopes – NO STEALING

Now, the only thing left to do is stick to the envelopes, and don’t forget them when you leave the house! If you forget them, too bad. You can either skip the purchase, or you have to go home and get the envelope. Since this should effectively take the majority of your money out of your bank account (leaving only enough to pay automatic bills and transfer the rest to savings or pay off debt), using your debit card would leave you in the red. Talk about motivation! You also aren’t allowed to steal from another envelope. Since these are luxury items, there shouldn’t be any reason to steal from different envelopes. If at the end of the pay period, you decide you really wanted more in your food budget, but didn’t use all of your gas money, you can adjust the amounts of each. The key is to get into the habit of only using what you have determined you are allowed to use, sticking to a budget, so stealing from your bank account or another envelope is counter-productive.


Are you working on reducing your spending & debt, or sticking to a budget? Do you have any tips to share? I’m always looking for new ideas, so please be sure to share below!!


Stay tuned next week for Week 2 of our Envelope Budgeting System Series!

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