Envelope Budgeting: Can it Help You Spend Less?

It’s a low-tech budgeting method – but the envelope system is a budgeting technique that has stood the test of time. Financial guru Dave Ramsey is among the supporters of the system, which is based on dividing cash up into envelopes each month (or pay period) to keep a better handle on variable budget items like groceries, entertainment, and clothes.

How Envelope Budgeting Works

The idea is to put your spending into real, physical perspective. If your monthly grocery budget is $600, you’d put that amount of cash into an envelope at the beginning of the month (or $300 each two-week pay period). That’s the amount you’d have to cover groceries for the entire period – and when the money runs out, you can’t spend any more on groceries until the next budget period begins.

Sarah’s Experiment

Sarah H., a Dollars & Sense reader, decided to try envelope budgeting during the month of August. After her experiment was over, we sat down with her to find out how it went.

D & S: How did envelope budgeting work for you?

Sarah: It worked pretty well. I would pause at the grocery store and ask myself, do I really need this? Using the envelope system also forced me to be more creative when it came to finding bargains. I worked harder to find coupons and take advantage of store deals and apps like Target Cartwheel – especially when I was buying school items for my kids.

D & S: What would you do differently?

Sarah: During the experiment, I divided my available cash among three different spending categories. Next time, I’ll combine them into a lump sum and use it for all my spending within those categories. During the month, I had extra expenses and struggled with whether I should borrow from one part of the budget to pay for another. For instance, I had school shopping and had to borrow from the grocery money to cover that.

D & S: Will you keep doing it?

Sarah: I plan to. I saw a big decrease – about $500 – in my credit card bill for the month.

D & S: Why did it work for you?

When I bought something and had to take the money out of an envelope, it made the purchase seem real. It made me think about every item I bought – because I didn’t want to make it halfway through the month and end up having to use my credit card or just doing without. I ended up saving a lot because it forced me to be more creative. One night instead of going out to dinner, I made up a new recipe out of things we had on hand. And it was good!

Ready to Try It?

Could the envelope budgeting system help you get a better grip on your cash? It’s worth finding out. If you want to give it a try, details about how it works – along with advantages and disadvantages – can be found on a variety of websites. After you try it, drop us a line and let us know how it worked for you!