How to Create an Envelope Budget System

March 18th, 2008

Earlier this week I talked about how we have been successfully using an envelope budgeting system for over a month now.  We identified some things that we spent outside the budget, but for the most part we did pretty well staying on track.  Well, I believe so much in this approach to help people get on track with a budget that I’m now going to share exactly how we came up with our system so you can make one too!


Photo by DarkYES

Be Flexible

One thing to keep in mind when creating any budget is to know that it will not be perfect on the first draft.  In fact, it probably won’t be perfect on the second or third either.  It takes time and many iterations to get to the point where your budget actually meets your planned expenses simply because things change too much.  If we all lived in a perfectly predictable world, budgeting wouldn’t even be necessary for anyone.


Choosing Categories

When we first started with our budget, we realized just how many categories there could possibly be.  Our first list consisted of just 5 categories, and then our second list had over 40 categories.  This was all before we’d even STARTED using them!  Believe it or not, I don’t really think it matters if you want to use a general set of envelopes or a really detailed set.  What really matters is how much time and effort you want to spend keeping track of each and every one.

Photo by drhunter

One key here is to only include categories for things that you can’t pay online or through an invoice or bill.  Things like mortgage, car payments, utilities, credit card bills, etc. aren’t good candidates for cash envelopes.  You should be paying these bills online or by writing checks for the bills as they come in.  The envelopes are for expenses that actually MAKE SENSE to use cash for.  Anything that doesn’t come as a bill in the mail is probably a good candidate for cash.  Again, it’s all about how much time and effort you want to put into it.

How did we decide to do it?  Well, after looking at that big list of 40 envelopes to make, we realized that a lot of them were related.  In fact, MOST of them were going to be purchased at the same store in one trip.  Can you imagine being at a checkout counter and having to gather up 10 envelopes worth of money and only take the right amount from each one while making people wait in line?  Well my wife sure as hell couldn’t either.  LOL!  This system has to be convenient folks, or you’re going to end up not using it at all.

budget categoriesWe took our big list of categories and started combining them not only based on how they related by items, but also based on where we normally purchased them.  For example, we have one single envelope for ‘Groceries’.  This envelope used to be SEVEN envelopes including food, pet foot, baby supplies, toiletries, cleaning supplies, gardening, and medicine (over the counter).  Well, we get all that stuff at the SAME PLACE.  Even if we shopped at 3 stores for all of that stuff, it’s very easy to get any combination of those categories at any one store.  It just makes sense for us to have one budget for an all-encompassing ‘Groceries’ category than to mess with balancing all those other groups.

image In the end, we took all of our categories and combined them into the following list (needs in bold) and labeled envelopes for each category:

  1. Groceries
  2. Automotive
  3. Clothes
  4. Health/Hygiene
  5. Medical
  6. Extra Curricular
  7. Gifts
  8. Pictures/Crafts


Calculate Amounts

This is probably the most difficult part of the entire project.  People try to get the most perfect number when doing this.  If you’re sharing your budget with someone else, then it gets REALLY hard.  This is where you find out what’s important to who, and where you’re willing to give up one thing for another.  I’m not going to go into the details of how to pick your numbers here, because "how to calculate budget amounts" is probably a whole book…not a paragraph in an envelope budgeting article.

image We started with our current budget.  We’ve been iterating over this budget for a number of months now, and it’s getting closer to what we actually spend each time we look at it.  We simply combined some of the categories on the budget to match our new envelope system and added up the numbers for each new category.  Once there, we knew how much to put in each one.

envelope amount Now I’m not one to advertise to the world how much money I put in each category, so I didn’t want to put my amounts on the envelope with the label.  I look at the spreadsheets often enough to know what the amounts are and use that to keep track of everything.  However, a nice little tip for those of you that like to forget how much you get each month in your envelopes could consider writing down the number inside the envelope so you can remember when you’re out and about.


Keep Track of Envelope "Deposits"

After using the envelopes a little while, I realized that there was really no way for me to know for sure exactly which ones I’d already filled and when.  There’s a number of different ways to keep track of this, and I actually do a couple of things.

budget tracking One way, is to keep track in your budget spreadsheet.  I turn all text in my budget spreadsheet blue once I’ve paid that amount to whatever bill, expense, or envelope "deposit" that requires my money.  Since my budget has a column for every single pay-period (I don’t budget from month to month, I base everything off of our 2-week pay-periods) I can keep track of when I paid each expense on its own pay-period.  So when I take the money to put it in the envelopes, I change the text in the spreadsheet to be blue for each category.


imageAnother way to keep track of when I put money in the envelopes is to keep a list of the dates that I’ve already made a "deposit" on the envelope itself.  I just made a few months worth of paydays along the bottom, and we cross them out when we put money in.  This way, when I’m in the store thinking "oh man, I’m not going to have enough for everything I wanted" I can look at the date and see how close I am to the next "deposit" and plan around it.  I’ve found this very helpful for my wife to keep track of how much we have to spend and more importantly, when we have it to spend.  She doesn’t like looking at spreadsheets all that much, but having the amounts IN the envelope and the dates ON the envelope, she can get an idea of what to plan around as well without actually going down to the computer.


Fill The Envelopes With Cash

Now for the fun part! :D  Whether you do your budget monthly or bi-weekly, the most exciting time around here for us is actually putting money in the envelopes.  Each pay-period, we stop by the bank and withdraw all the money needed to fill all the envelopes.  Having that cash in hand is such a strange feeling after having just used plastic for everything all the time.  It’s actually a lot of fun knowing that we’re going to only spend what we just took out, like a big oversized monopoly game or something.

That evening we sit down and fill the envelopes, check everything against the spreadsheet to make sure we have everything in order.  Update our blue text and cross out our dates…then we’re on our way until the next payday!


I hope those of you interested in making a budget system are able to do something very similar to get started.  Most of the hesitation in creating a system like this came from the fact that we thought we had to have everything perfect right away.  That is NOT THE CASE!!!  It won’t be perfect the first time.  You have to modify it over time to fit your actual needs!

So with this week’s theme that started with OUR successful envelope budgeting, I’ll continue to HELP YOU with envelope budgeting by showing you exactly how to modify your system over time in an upcoming post.

As always, I welcome any tips that any of you would like to add.  I also love hearing your stories and opinions, so jump in and let us know how you’re doing with your envelope budget system!

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17 Responses to “How to Create an Envelope Budget System”

  1. Jeanne Says:

    I’ve been using an envelope system for about a month also. So far, it has been very helpful and I have been controling my spending much more with cash than when I used a debit card constantly. I also find I am spending less time tracking my transactions. Previously, I’d enter transactions in MS Money, and then enter the same transaction on my budget spreadsheet. Now I just use MS Money. You are right about having to modify things as you go along. My biggest problem so far is that I have my groceries as a separate category from things like pet food, household supplies, and health products. Big mistake since I usually purchase these items at the same store. Just complicates things too much. So now I’m going to try combining those 2 envelopes into one. Thanks for your post. I enjoyed reading how you approach this.

  2. Mr. Debtbeater Says:

    Hey, glad I could help.

    We used to have separate envelopes (when we did this 10 years ago for a little while) but we lived in a larger city with more specialty stores that allowed us to save quite a bit of money. Now that the “super” stores are around it’s just easier to do it all in one place most of the time. Especially lugging around 6 kids behind you on some days. ;)

  3. tabuxander Says:

    great article!! Thanks. I try to live with envelope budget system next month.
    Wish me luck.

    Could it be difficult if you want to buy clothes, groceries, and medical at the same time? Do we have bring all the envelope to shopping mall?

  4. Mr. Debtbeater Says:

    Good luck using the system tabuxander! :D It’s definitely been great for us.

    We actually take our envelopes with us when we go shopping. If you buy things from multiple categories at the same store, you may want to keep track of how much you’re spending from each envelope and combine a pile of cash in one hand before actually paying for it in the checkout line.

    We generally don’t buy our clothes and medicine at the same place as our groceries, so this isn’t an issue for us often, but we do have to do it sometimes.

  5. Carnival of Personal Finance # 145: Baby Education Edition | Million Dollar Journey Says:

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  6. Ramona Says:

    I’ve been using the envelope system for 11 months now with great success. It is extremely comforting to know exactly how much to spend on a category, and to have the cash to do so. We also have an envelope for book purchases for each family member and what a joy to have those dedicated funds for rainy days! When I originally started with the envelopes, I didn’t do one for groceries, I just figured I would use debit. Well you know what happened - I constantly overspent. As soon as I switched to cash, I was extremely aware of individual prices - now as I shop, I add up everything in my head and make a little game of it to see how close I am to the actual. One point though - you have to be committed to the process, I tried the same thing about 10 years ago, and it just didn’t fly.

    Thanks for a great blog.

  7. Elliott Russell Says:

    Wow, well done :) You put a ton of information and effort into this post!

    I linked back to it so others will find it.

    All the best
    Elliott Russell

  8. Mr. Debtbeater Says:

    Thanks for the comments and support guys!

    @Ramona - I can totally relate to the differences between plastic and cash. We still struggle to add things up correctly to come in under budget, but it’s getting easier. Mrs. DB actually takes a calculator with her to help make sure things work out sometimes.

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  10. Peter @ Plan Your Escape Says:

    Mr. Debtbeater,

    I just wanted to let you know that I enjoyed your article and I plan on featuring it in my Friday Round Up post tomorrow on my site.

    All the best,


  11. Mr. Debtbeater Says:

    Thanks Peter! I really appreciate it. :)

  12. Steve in W MA Says:

    2 tips:

    Keep a “month’s set” of envelopes in a drawer, stocked with the month’s cash, and take a “carry set” of envelopes with you, with just a week’s worth of cash taken from the month’s set.

    Stock the month set with the full budget for the month.

    then every Friday or whatever day you decide on, once a week take a weeks’ worth from the month set and put it in your carry set of envelopes.

    then you don’t need to worry about tracking your “envelope deposits” as it just becomes a once a month thing.

    2nd thing:

    Include in your “month set” an envelope called “the bank.” that’s where you keep a good amount of extra cash (beyond the budgeted amounts) with a good selection of smaller bills, like $50 in ones, $100 in fives, and some tens and twenties.

    This makes it easy to make change for the envelopes.

    3) Include in your “carry set” an envelope marked “visa” or “mastercard”.

    This is so you can use your credit card as a means of payment in the cash envelope system. the first thing you do in the cash envelope system is always to go look in the cash envelope before making a purchase. But now, if you have reason to, once you have looked and seen that the dollar bills are in there for the purchase, you can decide to use the visa as a means of payment for the amount of the purchase.

    Now swipe your credit card and make the purchase.

    Take the amount of the purchase in cash out of the “gas” envelope and put it in the “visa” envelope. Now you have adjusted your gas envelope down, and designated that money to pay the visa bill at the same time.


    3 great envelope budget refinements.

  13. rainberryblue :: quotable sunday: thirteenth edition :: January :: 2010 Says:

    […] How to Create an Envelope Budget System at Debt Beater […]

  14. Matt Says:

    Here’s a tool to convert your envelope amounts into denominations for withdrawal:

  15. Heather Says:

    I am just starting the envelope system I started using cash a couple years ago for everything but bills. I found a great idea instead of envelopes you can use the envelope size expandle files. Just label each divider that way you can switch out your categories easily as you need to adjust and all of your money will be kept in the same container. It also allows 12 categories. I hope this suggestion helps some of you. I know it made me feel alot better I was nervous about having so many envelopes I was worried I would lose one or drop one when I am pulling out the one I need. I really enjoyed reading your post it really helped me figure out how I wanted to do my categories. Thank you.

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