The Envelope Budgeting System: Is It Worth the Hassle?

Working with a budget will help you to match your income against your spending, making sure that all your current and future needs are accounted for. There are numerous systems to choose from, including those requiring varying degrees of effort and planning. The envelope budgeting method—also known as “cash stuffing”—can help everyone rein in their spending. So, is it worth the hassle?

Understanding the pros and cons of this approach can help you decide if the envelope method is the right system for you or whether you would be better off using a different framework to keep track of your finances.

What is the Envelope Budgeting Method?

The envelope budgeting method is straightforward, though somewhat labor-intensive, and designed to make spending decisions completely tangible. At the beginning of each month, as you plan out your budget, you will physically place cash into envelopes labeled with your specific spending needs for the month.

Once the cash in each envelope is spent, you cannot make any more purchases in this category. The beauty is in the simplicity of the approach, as it is a physical way to monitor and understand your spending habits. It has the added benefit of removing credit cards from the mix, and you will not be able to make purchases if you do not have the cash on hand.

This works for expenses that tend to vary, such as food, clothing, incidentals, and discretionary purchases. Fixed costs such as mortgage payments, rent, utilities, and insurance would not be included in the envelopes as cash.

How Can You Start Using the Envelope Budgeting Method?

Like all budgeting frameworks, the first step is to conduct a review of both your monthly after-tax income and your current levels of spending.

Once you have a sense of your finances, it is time to plan ahead for the month of spending. Label your envelopes accordingly, and add the cash that you have allocated for each spending bucket.

To optimize the effectiveness of this method, it’s better to be more specific when defining your spending categories. For instance, instead of putting $50 in an envelope labeled “Fun with Friends,” consider placing lesser amounts in two envelopes, such as $20 for “Movie Night” and $30 for “Evening at the Club.” This will help to narrow down your spending into more incremental, finite chunks.

As you progress throughout the month, the money you spend should be extracted from these envelopes to make purchases. If you have no more money left in a specific envelope, this means that you will need to wait until the following month to make another purchase under this category. Alternatively, you can borrow from another envelope, leaving less money for another one of your stated purposes.

At the end of the month, any leftover cash can be plowed into savings or used to purchase items in the coming months.

Pros and Cons of the Envelope Budgeting Method

The envelope budgeting method comes with both advantages and drawbacks.

Advantages

(1) Tangible oversight of spending: Using cash for your purchases lets you know exactly how much you are devoting to each expense. Unlike credit or debit cards, the exchange of cash is a physical act and one that you will intrinsically feel when conducting the transaction. As the days go by, you will also have a visual of how much is left in each of your envelopes, which will serve as a real-time reminder of your remaining resources.

(2) Avoiding credit card debt: It is easy to fall into credit card debt, and as it tends to compound daily, it quickly expands and damages your financial standing. The best way to get out of credit card debt is to avoid falling into this trap. Under this budgeting method, you are limiting yourself to only purchasing with cash, so you can prevent yourself from being sucked into this destroyer of wealth.

Disadvantages

(1) Hands-on, intensive process: Going to the bank or ATM, withdrawing your spending for the month, and placing it in labeled envelopes, certainly requires more effort than simply using your credit card. As more and more options to go cashless present themselves, this system can get exhaustive at times.

(2) Loss of credit card points and discounts: Credit card companies offer several perks to get you to use their services. These include giving points and discounts at certain vendors, which can add up when making large purchases. You will not be maximizing these offers if you purchase everything in cash.

(3) Can be physically risky: One of the big advantages of keeping your money in a bank or credit union is that your deposits are federally insured. Having your money lying around your home in envelopes can pose a security risk, so make sure that you keep your cash in a relatively safe place so as not to fall victim to theft.

Does the Envelope Budgeting Method Work?

Like any budgeting technique, the envelope method is only as good as your adherence to it.

For most of us, it is harder to part with physical currency than it is to swipe a plastic card. This is a strong argument in favor of the envelope budgeting method, as it creates another means to prevent purchases that are not necessary.

That being said, it does require multiple layers of effort, both in the planning and implementation phases. Whether or not it is worth the hassle depends on your personal relationship with spending and how motivated you are to stay within your budget.

If you believe that the ability to closely monitor your spending—feeling the weight of each purchase—will help you take control of your finances, this approach could be the right system for you.

Conclusion: Finding the Right Approach for You

The best budgeting approach for you is the one that you will be able to live with. The 50-30-20 rule, zero-based budgeting, and other systems also have their proponents.

The envelope budgeting method will certainly remove the dangers of credit card spending, which can trap consumers in a vicious cycle of debt. That alone could be reason enough for you to follow this approach.

At the end of the day, you want to make sure that your income covers your expenses while you save money for the future. The envelope approach is one path you can take to achieve this objective.

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