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How to Use Envelope Budgeting: Old-School Cash System vs. Virtual Envelope Apps

November 14th, 2017 · No Comments · Budgeting

by Staff

How to Use Envelope Budgeting: Old-School Cash System vs. Virtual Envelope AppsPart of any financial goal – be it saving money, getting out of debt, or repairing bad credit – is getting yourself on a good budget. And the simpler it is, the better; you’ll be more likely to stick to it and, in turn, it will be more likely to work. Thus, the appeal of envelope budgeting, a simple system that people have been using for decades.

Envelope budgeting is exactly what it sounds like: You put cash in categorized envelopes and stop spending in those categories when the money is gone. But even this simple system has recently been complicated, as so much of the spending we do now is with debit and credit cards. You can certainly still use the old-school cash system, but you may find that an envelope budgeting app is the more practical choice. Here’s what you need to know about both.

Cash envelope budgeting

1) Figure out how much of each paycheck represents variable This is the money that the cash envelope system will help you budget better.

How much do you have left over after paying your fixed expenses? Fixed expenses include anything that you absolutely must pay each month, the amount for which does not vary (utilities being the exception), including:

  • Rent or mortgage
  • Utilities (which you can estimate for those that fluctuate, like water and electricity)
  • Cell phone
  • Cable and streaming services
  • Insurance
  • Childcare
  • Car payment
  • Student loan payment
  • Payment plans for paying off medical bills
  • Savings (both short- and long-term)

Whatever you have left over after paying your fixed expenses is income that can be used for your variable spending categories, also known as discretionary spending. Variable spending includes any expense with a spending amount that can fluctuate from month to month, including:

  • Groceries
  • Household items
  • Eating out
  • Entertainment
  • Gas
  • Clothes
  • Gifts

These are the categories that envelope budgeting is intended to help you keep in check. Because you cannot go over your budget on fixed costs (which the exception of utilities), but it’s easy – and all-too-common – to go over on what you spend on food, for example.

2) After you get paid, withdraw the variable spending amount from your bank account.

If you get paid by check, you’ll have to go to the bank anyway to make your deposit. But if you get direct deposit, as most of us do these days, you’ll have to make a special trip to the bank – or ATM – to get the cash you’ll need before your next payday.

Most of us try and limit as much errand-running as possible these days, but if you are going to use the cash envelope system, you cannot diverge from this step. Because as soon as you delay your trip to the bank, and pay with debit instead, you are defeating the purpose – discipline.

The reason the cash envelope system works is because you only allow yourself to spend money that is in the designated envelope. Sure, you can deduct the debited amount from the cash that you would have added to the envelope, but it’s a slippery slope that can lead to a bad habit.

3) Add up how much you typically spend in each category of variable expenses.

You may already have a pretty good idea, but look at bank statements just to be sure. If you pay with cash, look at receipts. If you don’t save your receipts, and you’re not sure how much you spend on what, it may be a good idea to hold off on the cash envelope system until you track your spending for a month.

4) Stuff categorized envelopes with the allotted cash amount.

Use any size or color of envelopes you like. (Or an accordion filing system, if you prefer.) Write on the envelope (or file label) the category of spending and the dollar amount.

As mentioned above, the most common categories include groceries, household items, eating out, entertainment, gas, clothes, and gifts. But feel free to break those categories up into smaller ones (e.g., household into personal hygiene and cleaning supplies) or combine them (e.g., groceries and household items). It all depends on your preference.

To start, though, it’s probably a good idea to go with the suggested categories. See how it goes the first month and tweak them, need be, the following month for as long as it takes to get it right. The same goes for the dollar amounts you are assigning to each category. For example, you may realize you’re spending less on gas than you thought and that you could use that money for your food budget instead.

5) Take money from the appropriate envelope before you leave the house.

You could take the whole envelope, but then you may be carrying around a lot more cash than you need. Not only could you lose it, but you could overspend. Sure, the money in the envelope represents how much you have for that category, but how many trips to the grocery store, for example, does it need to last before your next payday?

Leaving your envelopes at home can also be helpful if more than one person in your household is using the envelope system and needs to access the cash before you get back.

6) Do not borrow from other categories.

This may be hard your first month, when you could find that you grossly underestimated how much you need for food, for example. Provided you don’t have enough to eek by with before your next paycheck, you may want to give yourself a pass at first. In general, though, avoid borrowing from other categories. When the money is gone, it’s gone. You can always adjust it for the next pay period, but until then, make it work. If that means getting creative with what’s in the pantry, so be it.

Do you do a lot of your spending online?

Cash envelope budgeting may not be a good fit. Consider virtual envelope budgeting instead.

Virtual envelope budgeting

For many of us, using a cash envelope budget isn’t practical. More and more, we’re depending on Amazon, meal delivery services, and countless other ways of having goods delivered direct to us. That means dealing with debit and credit cards, not cash.

Or, even if you do shop mostly through brick-and-mortar stores, the logistics of getting cash and organizing cash and carrying cash may feel like more trouble than it’s worth.

In any case, you have options.

Here’s what’s different about virtual envelope budgeting:

  • Instead of using real envelopes, you use a budgeting app – like Mvelopes, YNAB, or GoodBudget – that lets you assign your money to virtual envelopes (or categories)
  • Instead of limiting your envelope budget to variable expenses, you can use virtual envelopes for fixed expenses as well (an impractical thing to do with a cash envelope budget, as we pay for rent, utilities, cell phone, insurance, loans, etc., with debit, credit card, or check)
  • Instead of taking cash out of the bank, you sync your bank and credit card accounts to the budgeting app
  • Instead of pulling cash out of a real envelope, you pay with your debit or credit card and assign that transaction to a particular virtual envelope
  • Instead of having to count up how much cash you have left in each virtual envelope, the budgeting app keeps track and displays it for you

And here’s what stays the same:

  • You start by adding up your fixed expenses and using that number to determine how much you can spread across your variable expense categories
  • You don’t spend in a particular category until after checking the balance in that envelope
  • You stop spending in a category once the virtual envelope is empty

Comparing envelope budgeting apps


Free version

  • 10 regular envelopes
  • 10 more envelopes
  • 1 synced account
  • Install on up to 2 devices
  • Archives 1 year of history
  • Community support

Plus version ($6/month or $50/year)

  • Unlimited regular envelopes
  • Unlimited more envelopes
  • Unlimited synced accounts
  • Install on up to 5 devices
  • Archives 5 years of history
  • Email support


Basic version ($4/month)

  • Unlimited envelopes
  • Unlimited synced accounts
  • Install on multiple devices
  • Interactive reports
  • Live chat support
  • Weekly Mvelopes webinars

Plus version ($19/month)

Everything you get with Basis, as well as:

  • Mvelopes personal finance trainer: quarterly checkup
  • Debt reduction tools
  • Mvelopes learning center
  • 1-on-1 setup assistance
  • High level priority support

Complete version (regular $79/month, on special as of this writing for $59/month)

Everything you get with Plus, as well as:

  • Mvelopes personal finance trainer: monthly sessions
  • Customized plan
  • Trainer-guided financial education



  • Unlimited envelopes
  • Unlimited synced accounts
  • Install on unlimited devices
  • Email support
  • Live workshops

Take a look at other personal finance apps for budgeting, as well as banking, debt management, and credit monitoring.

Budgeting basics

The envelope system is just one of many basics that can help your budget. So take the time to learn more so you can give yourself every opportunity for success.

Check out our Budget Breakdown: How to Create, Manage, and Tweak This Elusive Tool. In it, you’ll find:

  • Examples of financial goals to work into your budget
  • Tips on adding up your take-home pay
  • Suggested expense categories and sub-categories
  • An introduction to percentage budgeting systems (e.g., 50/20/30, 60/40, and Goldilocks)
  • An introduction to zero-sum budgeting
  • Tips on setting up automated deductions (for bills and savings)
  • Tips on tweaking your budget, need be

What do you think? Will you try an envelope budgeting system? Why or why not?