Envelope budgeting

What It Means

Envelope budgetingBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more sets a spending limitCredit limitThe most your card company lets you owe on a credit card or line of credit at one time. See more for each category and keeps that money apart, traditionally as cash in labeled envelopes. Groceries get paid only from the grocery envelope, gas only from the gas envelope, and so on. When an envelope is empty, spending in that category stops until the next budget period, unless you move money over from another envelope.

How It Sounds at Home

• "The grocery envelope's empty till Friday."
• "Can we borrow from the fun envelope?"
• "Pay for it out of the gas envelope."

The Breakdown

How to set it up

1. Pick the categories that change from month to month, such as groceries, gas, dining out and fun.
2. Decide a monthly or weekly amount for each one.
3. Put that amount in a labeled envelope at the start of the period.
4. Pay from the matching envelope, and note each purchase on it.
5. When one runs out, stop spending there or move money over from another envelope.

Worked example. A household sets up five envelopes for the month:

What the result means. The gas envelope ran dry with 1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more days to go, which shows the problem while there's still time to decide what to do about it. Moving $40 from fun to gas covers the rest of the month. Next month, the gas envelope probably needs to start higher and another envelope a little lower.

Good to Know

California's Department of Financial Protection and Innovation (DFPI) lays out the same rules: note each expense as you go, and when an envelope runs out early, either move money from another envelope or wait until next month. One option is to leave bills paid online, like rent and utilities, in the bank and use envelopes only for spending you do in person. Cash kept at home isn't covered by FDIC deposit insurance, according to the FDIC, so keep only what the current period needs.

Related Terms and Categories

• Cash stuffing

  A budgeting habit of withdrawing spending money as cash and dividing it into labeled envelopes or binder pockets, one for each category.

• Zero-based budget

  A budget that assigns every dollar of income to spending, saving or debt, so income minus everything assigned equals zero.

• Sinking fund

  Money set aside in small, regular amounts for a known future cost, so the bill doesn't land on a single paycheck.

• Bucket budgeting

  A budgeting method that splits your money into separate labeled buckets, such as bills, spending and savings goals, and uses each one only for its job.

• Budget category

  A group of similar costs, such as housing, groceries or transportation, that a budget plans and tracks together with its own amount.

Household money and budgeting