There are many different ways to put together a budget, and one of the most tried-and-true strategies is envelope budgeting. Whether you’re new to budgeting or an expert finance-wrangler, this approach can be a real game-changer for organizing your cash flow and, most importantly, sticking to your budget long-term.
What is envelope budgeting?
The concept of envelope budgeting is simple: you list out your expenses, label an envelope with each of those budget categories, and fill them with the cash you’ve allocated to each category. Spend as needed; when an envelope is empty, you know you’re at your spending limit for the month in that category.
Here’s an example: let’s say you’ve allocated $400 per month for groceries for your household. Grab that “grocery” envelope each time you head out to the store, and use the cash in it to pay for your groceries. Not sure how much is left in your budget? Just reach in and count those bills.
Benefits of envelope budgeting
The envelope budget system is a classic for a reason: because it’s tactile and immediate, you always have a clear and concrete picture of how much money you can safely spend. And if you use cash, you can see and touch the money you’re shelling out, which can make spending feel more “real” and therefore easier to manage.
Compare that to spending with a debit card. You have to remember your current balance, how much you need for other expenses, when your next check comes in…that’s a lot of mental math to know what you can afford in the moment. Putting money in budget envelopes gives you instant certainty for your spending—and makes accidental overspending much less likely.
Hang on a minute…cash? Like we said, envelope budgeting has been around for ages—like, pre-internet ages. But it’s still a solid system for budgeting today! Luckily, it has also evolved with the times! Whether you use an envelope budgeting app or Simple’s built-in budgeting tools, you can take your cash envelopes digital easily (and we show you just how to do that in step five below).
How to make an envelope budget in 5 steps
1. Figure out your monthly take-home income
Grab your most recent pay stub and write down your net income—that’s the income you take home after taxes and other deductions are taken out. Then list out any of your other sources of income, like child support, a side hustle, interest income, etc. Make sure you’re subtracting any taxes you might owe if some of your income is as an independent contractor! Add it all up to get your monthly take-home income.
2. Determine your budget envelope categories (aka, expenses)
Capture your expenses. Make a list of all your monthly expenses and how much you spend on each one. You might want to take a peek at your transactions for the last few months to jog your memory so you’re sure to catch everything you spend money on.
Here are a few common budget envelope categories to get you started:
- Utility bills
- Child care
- Minimum debt payments
Remember the irregulars! Make sure to list irregular expenses that don’t happen every month, like quarterly water bills or oil changes. Figure out the monthly cost of these to include in your budget; for example, if your quarterly water bill is $300, divide by 3 to get a “monthly” expense of $100.
Here are a few common irregular expenses:
- Car maintenance
- Clothes and shoes
- Gifts and holiday expenses
- Vet bills and pet expenses
- Personal care services (like haircuts)
- Glasses and contacts
Don’t forget to get ahead! Include budget envelope categories to pay debt down and save money up. Depending on your situation, you may want to pay more than the minimum on higher-interest debts to save on interest over time. (Here’s a primer on different kinds of debt.) Or you might be more focused on saving up to hit your goals—an emergency fund, a down payment, a new bike. (Here’s a guide to deciding how much to save.)
Add it up! Figure out the monthly cost of every expense you’ve listed above to see exactly how much you need to budget for each month. This article can help you figure out how much to budget for variable expenses that change a bit each month (like groceries or healthcare costs).
3. Compare income and expenses; adjust if necessary
Do you have enough monthly income to cover all your expenses? If the answer is yes, skip to step 4!
If the answer is no, that’s okay. It’s time for a deep breath and a close look at your expenses. Start by separating out your expenses into “essential” and “nice-to-have.” Essentials are anything you can’t live without—and that varies person to person. One person’s monthly massage “treat” might be a necessity for someone managing chronic pain. Only you can decide what’s essential for you.
Once you’ve identified your essentials, see if you can reduce your costs by saving on streaming services, cutting your heating bill, or reducing your electric bill. And when it comes to nice-to-haves (the things you could get along without if you really had to), prioritize what’s most important to you and what you could let go of. Here are some tips on having fun on a budget to help you get started.
If your expenses still outpace your income after trimming them down, take another look to see if there’s more you can cut (but don’t get too close to the bone, or you’re likely to go over your budget and get discouraged).
Another option is to consider a side hustle to increase your income. This article that digs into low/no income budgeting can help you out.
4. Mark your envelopes and stash that cash!
Use the budget envelope categories you listed in step two to decide exactly how many envelopes you’ll have and what to label them.
Get granular as needed. You might want to break some of those expenses down into even more specific categories. For example, do you want a “food” envelope that includes groceries and takeout, or do you want to split it into two envelopes? If there’s a cost you want to manage closely (like how much you’re spending on coffee runs), it’s a good idea to give that expense its own budget envelope.
Also consider context! If your gym membership is absolutely necessary for physical therapy, but those extra dance classes are just for fun, it might be worth breaking them up into two separate budget envelopes. While having too many categories is overwhelming, it’s easier to stay organized (and prioritize your spending) if you keep the “100% essential budget envelopes” apart from the “things I’d like to have budget envelopes.”
If you’re going the old-school cash route, grab a box of envelopes, a marker, and a stack of bills. Once you’ve labeled your envelopes, stuff them with cash and you’re good to go!
5. Take your envelope budget system digital
Some people find it really useful to go cash-only (or cash-mostly) to get on top of their spending. But let’s be real—you might not want to pay for everything with paper money (and it’s not always possible in the internet age). And you don’t have to, because it’s easy to make this entire envelope budgeting system digital with an envelope budgeting app!
If you’re a Simple customer, you don’t even need a separate app. You can use Simple’s built-in budgeting tools to create an envelope budget right inside your checking account—no Sharpie necessary! Just set up an Expense for each budget category—that’s your digital envelope. And create Goals as your savings envelopes—for the money you want to save up long-term.
You decide how often you want Simple to add money to each envelope. And when you spend, we’ll automatically take money out of the correct envelope to keep you on track. You can always see exactly how much is left in each digital envelope, and if you have any money over and above what you’ve allocated to your budget categories, Safe-to-Spend® shows you exactly how much you can spend spontaneously without disrupting the funds in your envelopes.
Is envelope budgeting right for you?
The envelope method is a time-tested way to keep you feeling confident, prepared, and in control of your budget. But if you try the envelope budgeting system and you just aren’t feeling it, don’t give up—there are lots of budgeting strategies out there! Try out one of these other approaches instead:
- The 50/30/20 budget method. This approach allocates your income among three main categories: 50% to needs, 30% to wants, and 20% to debt and savings. Read more on how it works.
- The zero-based budget method. This strategy entails planning for how you will spend or save every single dollar of your income each month. Here’s a guide to getting started.
Whichever approach you use, Simple’s built-in budgeting tools help you set up your budget right inside your checking account—and stay on course by automatically moving money and tracking your spending for you. And it all lives inside an awesome app designed to help you build your financial confidence.
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