How to Control Your Spending 102: Using the Envelope System

We kids teach kids how to spend using the envelope system; however, adults can use this system as well.

The envelope system gives us a better way to visualize our spending and income than debit cards and online banking.

But who should use the envelope method, and how will it benefit them in the long run? Welcome back to the How to Control Your Spending series (101), where we get a handle on our cash flow.

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Are you a candidate for the envelope system? How do you rate your spending on a scale of one through ten?

Some people can have thousands of dollars in their account and have no urge to spend. Other people can have $10 in their account and buy something for $11.

If you want to see how much of your spending comes from emotions or poor choices, use the envelope system. It provides excellent feedback on your spending progress throughout the month.

If you don’t feel confident about controlling yourself using a debit card, then use the envelope method. There is no shame in “going old school” and using cash for everything.

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How will using envelopes benefit you in the long run? It takes 30 to 90 days to form a habit. It may take even longer to change our money habits.

The envelope system presents a physical barrier to protect us from overspending. As we grab an envelope to make a purchase, we see how much is left.

This fraction ensures we are intentional with each and every purchase. Over time, we won’t need an envelope as the fraction happens in the background of our mind.

But we must start somewhere. Using debit cards (or, worse, credit cards) allows us to overspend on a whim, which is dangerous over time.

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When you go to Walmart with only $100 cash, you can only spend $100. If you go to Walmart with a budget of $100 but $200 in your checking account, you can easily overspend.

Let’s get started with the envelope system. So, how do we get started with the envelope system? It begins with a generic budget.

Our housing costs are the highest priority, so let’s start there. Usually, the mortgage payments come out on the first of the month.

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I would keep the mortgage payment in digital format because it is easier to maneuver. However, you need to withdraw the rest of your paycheck into cash. I recommend the following envelopes to start the process. 

1. Utilities
2. Extra Bills (steaming, subscriptions)
3. Food
4. Car
5. Miscellaneous (clothes, gas, random)
6. Saving & Investing

I know these are generic, but the idea is to narrow down your specific needs over time. Let’s look at an example of the envelope system.

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Dividing $8,000 per month. Let’s say Josh and Kristina earn $8,000 per month. Their mortgage is $2,000. On the first, they withdrew $6,000.

7. Utilities = $1,000
8. Extra Bills (steaming, subscriptions) =$500
9. Food =$800
10. Car =$1,000
11. Miscellaneous = $1,000
12. Saving & Investing = $1,700

Utilities. We want to pay our bills online so we can track everything. However, taking the money out and physically depositing it into another account specifically for bills is a good idea.

Utility bills have a habit of increasing slowly over time or having random months of higher prices. You must monitor these bills religiously, or companies will get over on you.

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I recommend having a checking and savings account just for utility bills. At the end of one month, move any remaining money into the high-yield savings account.

First, deposit the new money into your utility checking account. If something changes with one of your bills, use money from the miscellaneous envelope to pay it, not from your savings account.

This is the crux of using the envelope system—accountability. A higher price here means a cutback there, with no excuses.

Extra bills. Most of our random spending comes from little additional accounts like Netflix, Disney +, Microsoft Office, and Xbox Game Pass. 

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Again, I recommend having a separate account just for these bills. On the first of the month, deposit the money into your Extra Bills checking account.

However, if you go over budget, you must cancel something. These extras can creep up on you, so depositing money every month ensures your bills align with your goals.

Food. Food is the most complex and vital envelope to regulate. You can divide food into many groups; it can make your head spin.

Some groups are groceries, work lunch allowance, school lunch allowance, fast food, and restaurants. Ultimately, your family will need to work out the number of envelopes you need for food.

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A good idea is to divide your large food envelope into weekly envelopes. I can split the $800 into four weeks of $200.

This is a great time to do some couponing, dieting, or fasting. We don’t need to eat as much as we do, so why not throw in some weight monitoring while starting to use envelopes?

Cars. Cars are easy. The best thing we can do is pay off our cars and get out of automobile debt. With the envelope system, we see this right away.

Miscellaneous. This envelope is your go-to for random events and emergencies. Think of it as your monthly emergency fund. 

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It is not a free-for-all when you want to eat pizza or grab a snack. Over time, your miscellaneous envelope will slowly disappear as you create a deeper, more intricate system.

You can deposit whatever you have left in this envelope into your real emergency fund. Each month is a unique time to budget and save. Don’t carry forward money in this envelope, as it may lead to overspending next month.

Saving and Investing. My favorite envelope is the Saving and Investing one. Again, I recommend withdrawing the money and depositing it into its own separate checking and savings account.

You can have automatic withdrawals from here that feed into your high-yield savings account, Series “I” Bonds, Roth IRAs, index funds, and dividend stocks.

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The goal is to save and invest every penny that goes into this account. Over time, you will see the fruits of your labor via compounding growth in those accounts.

Conclusion. Does it make sense to withdraw all your cash and deposit it into new accounts? Yes. Sometimes, we need the tactile feedback of feeling out money.

Once we become sophisticated budgeters and investors, we can do everything digitally; however, we must start somewhere.

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It’s too easy to adjust our allotments to savings when online banking. The envelope system forces us to look at each dollar we earn and ensure we are great stewards of the future.

Building good money habits is perhaps the most demanding thing humans can achieve, outside of having meaningful relationships.

This is serious business, and we should treat it as such. Using envelopes ensures we value every penny that flows into our house and are intentional with our resources. Good Luck!

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