The envelope budgeting system is a time-tested method that uses physical cash (or digital equivalents) to control spending. When the envelope is empty, you stop spending in that category. It's simple, visual, and incredibly effective for curbing overspending.
How the Envelope System Works
The concept is straightforward: at the start of each month (or pay period), you withdraw cash and divide it into envelopes labeled with spending categories. When you need to buy groceries, you take money from the grocery envelope. When it's empty, you're done spending on groceries until next month.
ℹ️ The Psychology Behind It
Research shows we spend 12-18% more when using cards versus cash. The physical act of handing over money creates a "pain of paying" that makes us more mindful of purchases.
Setting Up Your Envelope Budget
Step 1: Identify Your Categories
The envelope system works best for variable spending categories where you tend to overspend. Common envelopes include:
- Groceries
- Dining out / Takeaways
- Entertainment
- Clothing
- Personal care
- Petrol / Transport
- Household items
- Fun money (each partner gets one)
Step 2: Determine Amounts
Look at your past spending to set realistic amounts. If you've been spending £500 on groceries, don't suddenly set a £250 budget—aim for gradual reduction.
Step 3: Withdraw and Divide
On payday, withdraw the total cash you'll need and divide it among your envelopes. Keep fixed expenses (rent, bills) in your bank account for direct debits.
Step 4: Spend Only From Envelopes
This is the crucial part. Only spend what's in each envelope. If your dining out envelope is empty on the 20th, you cook at home for the rest of the month.
Track Your Envelope Budget
Use iBudget to create digital envelopes and track spending in each category.
Digital Envelope Budgeting
Don't want to carry cash? You can apply the envelope concept digitally:
- Multiple bank accounts: Open separate accounts for different categories
- Budgeting apps: Use apps like iBudget to create virtual envelopes
- Prepaid cards: Load specific amounts onto cards for each category
- Spreadsheet tracking: Manually track "envelope" balances
💡 Couples Tip
Give each partner a personal "fun money" envelope. This eliminates arguments about individual purchases—what you do with your envelope is your business.
What to Do When an Envelope Runs Out
The system only works if you follow the rules. When an envelope is empty:
- Stop spending in that category until next month
- Get creative: Use what you have, find free alternatives
- Borrow from another envelope only if absolutely necessary (and adjust next month)
- Never use your card to "top up"—this defeats the purpose
Envelope Budgeting Pros and Cons
Advantages
- Visually shows exactly how much you can spend
- Makes overspending physically impossible
- Simple to understand and implement
- Creates awareness of spending habits
- No complicated tracking required
Disadvantages
- Carrying cash can be inconvenient or risky
- Doesn't work for online purchases
- Requires discipline to stick with it
- Miss out on credit card rewards
- Need to withdraw cash regularly
Is the Envelope System Right for You?
This system works particularly well if you:
- Consistently overspend on discretionary categories
- Find card payments "too easy"
- Want a simple, no-tech solution
- Need a visual reminder of your budget limits
- Are trying to break emotional spending habits
About iBudget
iBudget helps couples and families take control of their finances with simple, collaborative budgeting tools. Track spending, set goals, and build wealth together.
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