Envelopes and money have many associations. Tellers at the bank would traditionally give cash back to clients in a money envelope. If you were lucky, maybe a birthday card had a few dollars in it. And before we had the choice of cash transfer apps like Venmo and Paypal, coworkers might pass an envelope around to collect money for a special occasion or to help someone facing hard times.
Envelopes are also a great budgeting tool. They are a cheap, easy, and a very effective way to plan and control spending. For parents, they can be a helpful resource for teaching kids how to manage money.
There are many different envelope budgeting strategies, and two of the most common make use of actual paper envelopes. One system is to label an envelope for every major expense category in your budget and put enough cash in each envelope to cover that expense. Many people choose to budget by the month. However, you can choose weekly, bi-weekly (every two weeks), or any other time segment that works best for you.
Another method is to choose to make envelopes for only two to three budget categories that involve frequent, fluctuating spending, like food, household goods, or entertainment. Either way, as purchases are made from that category, money comes only from the assigned envelope. This helps to avoid overspending.
A third method is similar but involves using virtual envelopes on a phone or computer app to track spending, which can be helpful if you pay your bills online. There are several available for you to try.
Budgeting with envelopes is effective for several reasons:
- Using cash from an envelope involves multiple senses as cash is removed from the envelope to make purchase and we better experience the action of spending.
- It helps reinforce the fact that our money is a limited resource.
- There is less temptation to overspend.
The envelope method of budgeting is most effective when you commit to only spending what is in the envelope. If this becomes problematic, you may need to assess your budget and make adjustments. You can then boost the benefit by putting any money left unspent at the end of the month into additional savings.
For kids, envelopes are a simple way to introduce budgeting and saving concepts. And we can sneak a little consumer math practice in at the same time! Have your child place spending money in an envelope and write the amount on the outside. Then teach that they should only use cash from the envelope to make purchases, recording the item and amount and subtracting each time money is spent. Do the same when cash is added — record the source and add it in. This process helps kids to understand how to track their cash flow and gives them the elementary basis for balancing a bank account.
If controlling spending is a challenge, try the envelope method — it really works!