envelope budgeting

The Envelope Budgeting Method: Everything You Need to Know

Charles Dickens’ character, Mr. Micawber, had a recipe for happiness. It amounted to annual income exceeding annual spending, even by the small amount of sixpence. The opposite position of expenditure exceeding income resulted in misery.

How do you ensure that you keep your spending under control? There’s a little trick that people swear by to save money known as the envelope budgeting method. Read on to learn all about it.

What is Envelope Budgeting?

Online banking, cash machines, and credit cards allow spending to mount up. You are hardly aware of how much you spend. When you do check how much money is in the bank, you sometimes get a nasty surprise.

Envelope budgeting is a system for controlling your expenditure. It uses ordinary postal envelopes to help budget for everyday expenses. It helps you see exactly what you are spending your money on.

The envelope system gives you immediate feedback on how much you are spending and how much you have left to spend. It’s as simple as looking in the envelope.

If there is cash in the envelope, you have money left. When it’s gone, it’s gone.

Use Cash Only

The key to this system is to switch to living on cash. It seems radical but perhaps that’s what you need, to get control. Stop using credit cards for everyday spending.

If you find that you need to control the urge to splash out using plastic, stop carrying credit cards around with you. Keep them in a safe place at home. There is a place for them but it’s not for everyday spending.

List Your Expenses

The envelope method operates on setting budget categories. Start by listing your monthly spending. Group things together until you have a small number of categories.

You will have some fixed spending items such as rent or mortgage payments. There will also be some things where you have more discretion over what you spend. These might include food, social life, and clothes.


The tough decisions are about how much you can afford to spend each month on each category. Use the history of what you have been spending from online budgeting tool or analysis of your credit card spending. Make the tough decisions now about what you can spend each month in each category.

Don’t budget to spend more than you earn. Remember Mr. Micawber’s life lesson.

Your non-variable spending such as rent or mortgage payments, fixed utility bills and subscriptions can be paid by automatic payment or direct debit from your bank account. At the start of the month, withdraw the rest of your monthly budget from your bank account in cash.

Time for the Envelopes

Write each budget category on to an envelope together with the budget amount. Put the appropriate amount of cash in each envelope. You can do this once a month or more frequently but don’t exceed the monthly budget.

When you do food shopping, use cash from the food envelope. When you buy clothes, use the cash from the clothes envelope. For more control yet, list what you have spent on the envelope, on a pad you carry with you or on a smartphone app.

For more convenience carry a float in your wallet. Use your float to make the purchase and keep the receipt. Replenish your float from the appropriate envelope.

What About Online Buying

If you do some of your buying online there’s an envelope budgeting method for keeping control of that too. Set up an envelope marked “online”. This one starts the month empty.

If you make an online purchase move money from the appropriate cash envelope to the online envelope. At the end of the month, bank this money or use it to replenish the other cash envelopes.

Piggy Bank

Don’t mess about with coins in the envelopes. Put any coins into a piggy bank. You’ll be surprised how soon this accumulates.

You’ll always have coins for small purchases like parking. Try not to break into larger notes unless you have to.

No Cheating

When it’s gone, it’s gone. Don’t cheat yourself by borrowing from other envelopes. Doing this might mean you spend money on urgent wants rather than important needs.

Every now and again check the envelopes to see how buoyant your funds are. If you are running out of money for going out, perhaps it’s time for an evening in. Find creative methods of making your money go further.

Review your budgets every few months in case you need to re-allocate the budgets.


It’s important to stay motivated. Celebrate successes like an end of the month surplus. Have a treat such as a fancy cupcake or a beauty treatment.

If the going gets tough to keep your eye on the prize. Remind yourself why you are doing this.

Explain what you’re doing to friends and family. It’s harder to break the rules when you’ve explained to everybody how committed you are to this method. Focus on achieving a surplus.

Surplus funds could be the basis for paying off debt or saving for the future. They could be accumulated towards a planned future spend on a big item.

What’s the Result?

The reason why you might need an envelope budgeting system is to get control of expenditure. Doing this means avoiding debts and the cost of financing debts. It means living within your means.

Spending less than you earn means you can save for the future. You may find that you appreciate what you do spend your money on more because you are doing it more consciously.

Start Now

Go and find some envelopes. The time to start is now. Get to work now on your budgeting and take control.

Envelope budgeting is not about the misery of being miserly. It’s the basis for your future happiness.

To learn more ways of managing your money, click here.