Introducing Envelope Budgeting:
The Simple Cash Budget

The envelope budgeting system I’m about to share with you is my favorite part of this entire process. Mastering the art of controlling your cash is crucial to your budgeting process, and your sense of control over your finances.

Envelope budgeting is not a new, cutting edge concept – actually, quite the opposite. My father has used this incredibly simple tool my whole life, and his mother used it as well. I suspect it has been the preferred method of managing money for several generations back.

But the reason it has endured over the years, and the reason I like it so much, is because no system for monitoring and controlling spending is easier or more effective than envelope budgeting.

Begin by identifying certain expenses as cash expenses. These are things you can pay for with cash instead of writing a check or using a debit or credit card. You’ll keep the cash to pay for these expenses in envelopes – a specific envelope labeled for each expense. So much per week for groceries, so much for entertainment, etc.

As you incur each expense you’ll pay for it out of the appropriate envelope. Here’s the key: when you have spent all the money in a particular envelope, that’s it for that item until the next regularly scheduled infusion of cash.

Such a simple concept, but it takes a little practice before it becomes a habit.

Let me give you an example.

I fill my envelopes every 2 weeks, so I begin with 2 weeks’ worth of grocery money, 2 weeks’ worth of entertainment money, etc., in my envelopes. I know what my weekly allotment is for each expense, and I have to be careful to not go over it. If I spend more than my weekly allotment in the first week, I won’t have enough money left in the envelope to buy what I need the second week. (Remember, I’m not allowed to pull money from other places. The money in the envelopes is what I’ve budgeted for these expenses, so that’s it.) It didn’t take more than once or twice of making that mistake for me to gain enough discipline to spend the money wisely, within budget, one week at a time.

The same is true for my entertainment money. I allow the family $45 per week entertainment money (what we call “fun money”). That’s usually spent on eating out on the weekend, so, we have decisions to make. We can choose a nice restaurant for one dinner and eat home the rest of the weekend, or we can pick less expensive options and eat out for two or three meals. It’s great to have options! BUT – if we spend all $90 in the first week, we don’t eat out at all the next week. {:<(

Once we spend what’s in the envelope, that’s it until the next “pay day.” It’s that simple.

So, that’s envelope budgeting in a nutshell.

Well, actually making it work in your life may be a little more complicated than that, but not much. Let’s walk through it step-by-step....

Step 1 of envelope budgeting is to identify which expenses you’ll pay for with cash. Go back to your budget worksheet and put a checkmark (√) next to each expense that can be paid for with cash instead of a check (or debit card.) That basically means any expense you’re paying in person rather than through the mail. (Never send cash through the mail!)

Groceries, gas, clothes, grooming, eating out and entertainment are all examples of expenditures that are easily paid for with cash. Your gardener, housekeeper, barber, and your personal allowance or the kids’ allowances are also perfect cash expenses. Take a moment to identify all of the expenses in your life that fit the envelope budgeting plan.

Step 2 is to determine how often – and when during the month – you will refill your envelopes. There are two guidelines:

  • ideally you should do this two times per month
  • those times should be near your pay days

I get paid twice a month – on the 15th and on the last day of the month. My cash infusions are scheduled for the 1st and 3rd Fridays of the month, and most months that’s very near one of my pay days.

If you get paid just once a month, you still want to refill your envelopes twice a month. Doing it just once means you have too much cash lying around the house at one time. Not only is it unsafe, but it’s also just too tempting to overspend. Why make it hard on yourself? Help your self-discipline by keeping no more than two weeks’ cash available at a time.

If you get paid each week, you’ll probably want to refill your envelopes on a weekly basis that coordinates with your pay days.

Step 3: Now you need to determine the amount of cash you’ll need for each infusion. The easiest way to explain this is to tell you what I do.

  • To begin, I looked at all my cash expenses and figured out which ones get paid weekly (groceries, fun money), which ones get paid twice a month (gardener), and which ones happen just once a month (personal grooming, hair cuts).
  • I figured the weekly amount of each weekly expense. Since my cash infusions cover two weeks of expenses, each one includes two weeks of grocery money, two weeks of fun money, etc.
  • For the expenses that happen twice a month, like my gardener, I just split the monthly amount in half and include half in each infusion.
  • The monthly expenses are just slightly more complicated. I determine when in the month they need to be paid and I include them in the closest infusion before that date. I try to split these expenses as evenly as possible between the two infusions.
  • I keep a list of all the expenses (and their amounts) that make up the two cash withdrawals. That way I always remember how much cash I need, and for what. And I can always adjust them if I need to.

Step 4 is a critical step. When you withdraw the cash to put into your envelopes, always get the exact change and the necessary number of each denomination of bills so each envelope has precisely what has been budgeted for that expense. If your eyebrow waxing costs $10 and you give a $2 tip, get $12 for that envelope – not $15. Look at your cash expenses and figure out how many $1s, $5s, $10s and $20s you need to put the exact amount of money in each envelope. The system will fail if you do not work with specific amounts of cash.

Even though you’re working with precise amounts for each infusion, your cash needs may change a little from month to month. This is especially true if you have expenses that happen less often than once a month. But be careful – don’t just add something into your cash withdrawal out of the blue. Envelope budgeting is a method of paying for expenses that have already been included on your budget worksheet and that fit into your balanced budget. An expense has to pass that test first before it earns an envelope of its own!

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