What is the Envelope System?

The envelope system is a type of money-budgeting system that many people use when they are trying to get a handle on their finances. People follow the system by creating separate envelopes for different types of expenses, such as gas, groceries, and entertainment. A certain amount of cash is generally placed into each envelope, and this amount of cash is all that will be allotted for the expense of each designated envelope. For example, once all the money is drained out of the entertainment envelope, there is no more money available for that expense until it is time to replenish the money inside the envelope, which might occur either every week or every month, depending on a person's individual preference. The envelope system is supposed to be beneficial because it can help correct destructive spending habits by forcing people to be more careful about how they spend their money.

A monthly or weekly budget should typically be created before the envelope system is planned out. It is generally easier to come up with the maximum amount of money allowed for each envelope if all other necessary expenses are figured into the plan. Once a person knows how much money he has to reserve every week for things he must pay, like rent, mortgage, and electricity, he can then come up with a general idea of how much he can afford every week or month for the expense categories his envelopes will cover.

People who are just beginning the envelope system initially need to think about what types of things they generally spend too much money on. Entertainment and food items tend to be some of the most common things that people spend more than they need to on each month. The envelopes should be created with categories like these in mind, and people should think about the maximum amount of money they want to allow for each of these expenses. Once the money is placed inside each envelope, a person should realize that that is all the money she can use for those expenses until either her next payday or the next time she decides to replenish her envelopes.

Many financial experts believe that the envelope system is very valuable for people who have the desire to get a handle on their overspending. People who use debit cards, credit cards, or checks to pay for things instead of cash may have a harder time visualizing how their money is disappearing with each little purchase they make. When purchases, particularly unnecessary ones, are made with actual cash that comes from an envelope containing all the cash available for a specific category, it may be a lot easier to see how quickly money disappears and get in the right mindset to correct bad spending habits. People who follow the envelope system are often very thoughtful about the purchases they make and tend to avoid buying things they don't really need unless these things fit well into their budgets.