7 Reasons the Envelope Budgeting System is a Terrible Idea

On its surface, envelope budgeting seems like a good idea. That is, until you try it.

Believe me, I’ve tried it. And tried it. And tried it. And every time I’ve tried it, there’s some reason that envelope budgeting doesn’t work for me and my family.

If you’re considering envelope budgeting because you think it’ll help you control your spending, stop going into debt, or meet other financial goals, good for you. But before you try it, check out these reasons envelope budgeting may not be such a fabulous idea.

1. You Need to Carry a lot of Cash

The traditional envelope system involves putting cash for different spending categories in envelopes. Which means that the majority of your spending (besides paying bills online or with checks) is done in cash. Which means that you have to carry a ton of cash. Which, especially for a forgetful person like me, is a little scary.

2. Super-Strict Budgeting Isn’t Always Helpful

Envelope budgeting hinges on a very strict budget with minute categories for everything from grocery shopping to clothing to dining out. This type of budget may make a Type A personality feel better, but it’s usually not that helpful and can be really stressful for the rest of us.

3. There Are Better Budgeting Systems Available

The huge number of online and computer-based (and smartphone-based) budgeting systems today make envelope budgeting pretty much obsolete.

Some of these systems, such as EEBA (Easy Envelope Budget Aid), keep track of virtual envelopes, and others, such as Mint.com, update transactions automatically. One of the best is You Need a Budget (YNAB), which helps you live off of last month’s income and is one of the best ways to keep your financial life even-keeled.

4. You Can’t Take Advantage of Credit Card Rewards

Despite what you’ve heard, (ahem, Dave Ramsey) credit cards are not the devil. Sure, some people have trouble controlling their spending when they use credit cards. But that doesn’t hold true for all people.

In fact, using credit cards to pay for basic expenses, and then paying those credit cards down, can be a great way to rack up rewards, which can be used in lots of different ways.

5. You May Have to Juggle Shared Cash Around

One of the biggest glitches my family has had with envelope budgeting is with grocery money. I do most of the shopping, so I tended to carry the grocery cash. That was  a problem when I’d ask my husband to swing by the store to pick up some odds and ends on his way home from work.

He didn’t have the grocery envelope, so he paid for the groceries out of his allowance envelope, and then we had to reconcile it later. Or he had to swipe the debit card, leaving our budget unbalanced for the month.

Unless you are very, very good at planning ahead and would never be without the cash you need at the time you need it, envelope budgeting can be annoying in this way.

6. Sticking with Categories Can be Tough

Again, with the minute categories! Let’s say that you head to your local Wally World to pick up some bread and cheese, a pair of flip flops for your kid, a new lamp for the living room, and a shirt for yourself. If your family is like mine was on the envelope budget, each of those things has its own separate envelope (groceries, kids, home improvement and clothing).

So how do you divvy that all up at the register? Do you run each transaction separately? (And risk being murdered by the people behind you?) Or do you pay out of one envelope and juggle the differences later? (Which, by the way, will leave you with weird amounts of change that you probably don’t have.) Again, frustrating and confusing.

And don’t even get me started with how we worked it out (by putting money back in the bank, usually) when we decided to buy something online.

7. You May Need a lot of Money Available Up Front

As a paycheck-to-paycheck sort of family (we’re working on that!), we had a lot of trouble filling our envelopes at the right time.

Say we budgeted $300 for groceries for the month. Well, between paying rent and other essential bills with that first paycheck, we didn’t have $300 left. So we’d take out $50 for groceries, but then we’d have to remember to take out the other $250 with the next paycheck.

But between checks, we’d often need a couple of items here or there, so we’d end up with a grocery budget balance of more like $243. And you can’t withdraw $243 directly from the ATM. (And who has time to go into the bank, I ask you?)

The months when we could fund most of our envelopes at the beginning of the month were a little better, but they were few and far between. Budgeting per paycheck would make this slightly easier – if I weren’t a freelancer with unpredictable paychecks.

Some Other Options

With all this said, I do know some people who have made the envelope system work. Like my grandparents. In 1966.

But for most of us, it’s outdated in a day of awesome credit card rewards, online spending (which you can’t do in cash) and excellent budgeting tools.

Luckily, I’m going to give you a rundown of some alternatives that can help you control your spending without losing your mind:

  1. Rob’s easy budget. Basically, Rob budgets for the set bills he has to pay and then keeps tabs on the rest of the spending, which his family can divvy out as they please. The rest of these four budgeting techniques can all be used with this laid-back budgeting style (or, if you want to categorize things a little more, you can).
  2. The YNAB system. You Need a Budget helps you build up one month’s surplus in your checking account. (Shocking, I know!) Then, you budget each month out of last month’s income. So you don’t ever run your checking account balance to $0, and you have some emergency leeway when you need it.
  3. A Mint.com budget. I use Mint.com because A) it’s free, B) it automatically downloads transactions so I don’t have to record them, and C) it tracks spending on neat little graphs.
  4. A good, old fashioned spreadsheet. Spend on your credit and debit cards, and track it all on an old-fashioned Excel spreadsheet.

Have you ever tried envelope budgeting? Did it work for you, or not?

Topics: Budget

3 Responses to “7 Reasons the Envelope Budgeting System is a Terrible Idea”

  1. J Suzanne

    It was great reading this article because I thought I was the only one that tried the cash-only envelope system and didn’t like it. I found that using an Excel spreadsheet, as I had done before, worked best for me. The only thing I take cash out for is eating out because I’m single, and it becomes so easy to lose track of spending using the debit/credit card when going out with friends for dinner or drinks. Other than that, I use my rewards credit card for fixed monthly bills (which I pay in full each month) and my debit card for everything else.

  2. I started using the envelope budgeting system a couple of years ago, and came up with a hybrid method that works for me. I divvy up a cash allowance into envelopes once a week. I use a spreadsheet to track my monthly spending on fixed expenses, such as the mortgage payment (on auto-pay) and auto-transfers to savings. For variable expenses though, I was more likely to overspend. On the spreadsheet, I only note the weekly visits to the ATM to withdraw my allowance. The envelope method absolves me of noting each individual transaction on the spreadsheet. Also, when I go grocery shopping, I have to consciously get the money from the “Food” envelope before I shop. I don’t carry a lot of cash on me at any one time. I’m less likely to casually stop by the grocery store on the way home for that “quart of milk” that ends up costing $40! For predictable annual expenses like insurance, I subtract the monthly amount I need to save on the spreadsheet, creating a fake account balance so I’m building up the savings within my checking account. (I do reconcile my real bank balance on the same spreadsheet.) For unpredictable expenses like gifts and clothing that may come up at any time, I build up cash in the envelope. I see how much I have before shopping. I may still use a credit card and “recycle” the cash in my allowance the following week, requiring me to withdraw less money. That way, I have the money in my account to pay the credit card bill. I don’t track change…rounding to whole dollars is a lot less tedious and I stick with this budgeting technique more than any other. I notice with this method, I always have enough money at the end of each month to buy things I need, very comfortably. Before, I was overspending after I got paid, and then had to stretch…sometimes a lot…just before my next payday, or steal from my savings account, which wasn’t meeting my financial goal. One thing I learned from budgeting for variable expenses this way was that I used to go out for coffee much more than I realized. I have curtailed my coffee habit, opting for home-brewed instead.

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