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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?

Author Bio

Total Articles: 279
Abby is a freelance journalist who writes on everything from personal finance to health and wellness. She spends her spare time bargain hunting and meal planning for her family of three. She has a B.A. in English Literature from Indiana University–Purdue University Indianapolis, and lives with her husband and children in Indianapolis.

Article comments

J Suzanne says:

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.

Becky says:

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.

Stephanie Colestock says:

I love your method, Becky, and am glad it’s working well for you. Thanks for sharing!


William says:

There are ways you can take the principles of envelop budgeting and apply them electronically. For me, mint.com is almost there (if only I could carry balances month-over-month in each category, then it would be perfect). What I do instead, however, is use GnuCash (it’s free), and build out my expense and income taxonomy. Then, to fill the envelopes, I add a budget sub-account to each of my expense and income accounts, and budget out of these. I also add a savings account to track my true savings (not my bank savings, but rather, the savings that is left after all of my budgeted spending and forecasted income).

It takes some work to set it up, and some getting used to, but it works. At the end of each month, my budgeted income – actual income is always net zero, my budgeted expense – actual expense = whatever I have left over to carry to the next month (in each category), and whatever is left in the budget goes to savings (or to a debt budgeting account if you are paying off consumer debt).

Happy budgeting everyone.

jpek says:

William, can you say a bit more about how the budget sub-account and the savings works? I guess the budget sub-account is your envelope? But how does money travel from your income sources into this account and then how does it get transferred to the particular category of spending? And then how does the savings work? Is there only one savings or a savings for each category and where does this savings account reside in the taxonomy?

่jojo says:

The reasons the CES didn’t work for it’s the reason why you fail at budgeting. If you know how to budget it’s no fuzz to carry cash because you will budgeting it by weeks. And when you ask your spouse to pick up grocery because you don’t budget well enough so you run out of things before the end of the week. It’s user error, mot system error.

Katelynn Lane says:

As all of you know, it comes down to the person who is using it. To me and my family, the Dave Ramsey envelope system worked for us. It kept us in check of everything and even though sometimes we struggled, we got through it. Since I like to be the rebellious one of my family, I use a hybrid method that works for me, but maybe not for anyone else. I have a paper that has my monthly budget on it and I carry it around with me in my wallet. I use my credit card to buy my necessities and wants and then ask for the receipt. After, I would subtract the amount on my receipt on my monthly budget paper to get the new amount for that month. This works for me because I’m forgetful and I don’t like carrying tons of money with me.

Shelli says:

The whole purpose of envelope budgeting is that when you pay cash, it hurts. Swiping a card doesn’t have the same effect. So, online budgeting tools don’t work the same. If it was purely math and budgets people wouldn’t overspend. It’s psychological; not mathematical.

Ian says:

Actually, the whole purpose of envelope budgeting is to *have a plan for your money* and to be able to adjust when you veer from your plan (believe you will at some point). You can set up great envelope budgets using modern software, with or without using cash.

Rich says:

We have been using a budget software that utilizes the envelope system for years now (started out with Larry Burkett, and Dave Ramsey took his following after Larry passed away). The envelope system doesn’t need cash. We NEVER use case. This software has an option for a credit card, and it takes it out of the proper envelope. When the card pays off each month, we transfer from our bank account envelopes to the credit card envelopes, and it’s done. This allows us to quickly and easily see what we have available to spend each month, and where we are going over. This article is poorly written to push people away from this system. If it works for you, then go for it.

Dophiamia says:

Hi, I’m looking for a system like your talking about. It’s to crazy to use cash, one for safety reasons, second we do most spending and bill paying online. Even our groceries we buy online, except fresh produce and dairy and even all our pet food is purchased online. However we want to do the envelope system. I wish a bank would do small sub accounts (envelopes) that we could name and put money in. Until we have one, what you describe sounds great. What is it called, and where can we get it?
Thanks 🙂

Marina says:

Check out the budget mom budgeting by paycheck method

Paula says:

I was a programmer and then a web developer for many years, and I wound up writing my own web-based software to do what sounds like you’re looking for. The big drawback is that it would require you to have your own web hosting account with a database, which is a show-stopper for most people. Running the server for other people would require a lot of security and resources, and I’m near retirement so I really don’t want to start a project like that. But I might make the software available if anyone’s interested.

Savannah says:

I use Ally Bank and did exactly that, creating separate checking accounts for envelopes. I just:
– Clicked on something like “Open Accounts” (while logged in)
– Told it to create checking accounts with the names of my envelopes
– Gave each new account(s) a dollar just to kick things off
– Decided if I wanted checks and debit cards for each account

It was really easy, since everything just attached to my overall account. Before I had an interest in envelope budgeting, I created separate savings accounts for similar reasons. So I also have savings accounts set up for different things, including my rainy-day fund, my mortgage payment (thus earning interest while the chunk of money sits in there), etc.

Downside is that you’re left with a bunch of random checking accounts if you don’t stick with envelope budgeting — like me. I could probably just close the accounts, but I haven’t tried. So they kinda sit there, always reminding me that I need to restart my budget. Which is probably for the best, since I’m going to try again next month.

Side note: I’ve used Ally for years now, and haven’t had any reason/desire to look elsewhere. So I don’t know what’s possible with other banks, but it’s worth looking into the options for yours.

Or try Ally, if you want. They’re dependable and have good customer service (although I haven’t contacted them in probably 3 or 4 years), they automatically increase interest rates when they can (and decrease them, as they recently did), reimburse you for any ATM fees, let you easily transfer between accounts, and offer a lot of flexibility.

I think their biggest downside would be hooking into third-party budgeting software, because I seem to always have to give my full login to do that, and I don’t like putting my savings accounts at risk. But if you’re specifically interested in envelope budgeting this way, I guess you wouldn’t need other software.

Also, apparently some reviewers have problems with their CDs/auto loans/etc. I can’t speak to that at all, and can only say from personal experience that their checkings, savings, and bill-pay services work well. I have no feelings about their money market accounts either way (I think I have two, they just seem like an in-between type of account to me, with higher interest than checking but same transaction limits as savings).

… Somehow that turned into an Ally review. Anyway, I hope it helped you a bit to know that you can use a bank to directly do envelope budgeting. It was too hard for me because most of my transactions cross categories and I’m not patient enough to keep transferring the right amounts between envelopes/accounts. (Unless I wanted to divvy up my purchases and put them on separate cards.) But it can be done, if you’re better about that than I am. And I will try again! (… Hopefully!)

Michelle L Twitchell says:

I am older single person I love the envelope system. Household bills are paid online then recorded in budget. Envelopes are labeled gas, groceries, haircut, car payment, lawn mowing and pet food. Loose change goes into a jar. I had a cancer diagnosis last April and in remission that diagnosed wiped me out financially starting over. I meal plan, make my meals from scratch, keep a stock pantry. A friend gave me a car for a under 2000. I pay 125 month. Trying to pay a ton of debt and student loans as well.

Blanca says:

It’s not necessary to pay always in cash as long as you write down (after, at home) what you have paid with your credit/debit card. You can keep track anyways. I pay 90% of the times with card, but keeping my receipts inside an envelope helps me to keep all my receipts in order. They are no longer all around and, if I need one, I know exactly where it is.
And no, you don’t need to have a lot of categories, you can just split into “groceries” and “others”, or just tackle the categories that you are worried about and you want to controll and minimise.