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The Envelope Budgeting System Explained and How to Use It in the Digital Age

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These days, it seems like there's a way to budget meant to help every personality type. But have you ever heard of a budgeting method that involves envelopes of cash?

Yes, it may sound old-fashioned, but the key principles can still be applied today for help saving money. 

At its core, the envelope method is a monthly budgeting approach that sets limits on spending categories. But for the right person, this method can mean so much more than that.

First, let’s discuss how the system has worked traditionally. Then, we’ll do a reality check and show you how to adopt this approach while taking advantage of online tools. 

How traditional envelope budgeting works

Step 1: Subtract non-cash, fixed expenses

Subtract all the regular expenses that you can’t pay for in cash like your mortgage/rent, utilities, etc. These expenses will not be part of your cash envelope system. 

Step 2: Create spending categories and limits

Divide what’s left into individual spending categories and create separate envelopes for each. Here are a few examples:

  • Grocery envelope 
  • Transportation envelope (public transportation, gas, car maintenance)
  • Dining out/delivery envelope
  • Shopping envelope (clothing, accessories, other purchases)
  • Savings envelope
  • Emergency fund envelope

Step 3: Place money in envelopes and only spend allotted amount per category

Place enough money in each envelope to cover these monthly expenses. We know this may sound crazy, but again, this is the traditional approach and following this process can help you get in the right budgeting mindset.

The goal is to spend exactly what you set aside in each envelope – with the exception of the emergency fund. Once the envelope is empty, there’s no money left to spend for that category – and that's the key to helping you stay within your budget.


For today’s consumer, online tools can help you budget with the same mindset – and manage your finances holistically – with far less hassle. 


If you do need a little bit of extra cash for that category (we’re human, this happens), you can shift excess money from one envelope to another. 

Step 4: Evaluate your spending habits every month

Track your spending at the end of every month and see if you have any money left over across all of your categories. You can either roll over what’s left into the next month, or put it into a savings account.

Decide if you need to change the limits or alter the categories to better fit your spending patterns. 

How to use the envelope budgeting approach with credit cards and digital tools

While the cash envelope budgeting system has an easy-to-understand approach, the envelope budgeting system can be time-consuming and dated. On top of that, there’s a number of reasons why many of us don't use cash for purchases: 

  • Ability to earn rewards on certain credit cards and other payment options compared to cash, which earns no rewards.
  • More people are shopping online and making online purchases through their mobile devices.
  • Hassle with spreadsheets and formulas instead of just linking your bank accounts and credit cards to a personal finance digital tool.
  • Little security or fraud considerations compared to credit cards and debit cards, which have multiple layers of security, potential chargeback protections, and capabilities to cancel card if lost or stolen.
  • Few insights into how you spend your money at a particular store over time by using cash compared to using tools that can automatically track your credit card transactions.
  • Increasing trend of stores and restaurants not accepting cash as a form of payment.  

Given all of this, some budgeting apps can provide the same philosophical value of the money envelope system, but for a cashless budgeter. 

Apps could automatically categorize your transactions and offer weekly budgeting in the following areas: 

  • Auto and commuting
  • Bills and utilities
  • Cash and checks
  • Dining and drinks
  • Education
  • Entertainment
  • Fees
  • Gifts and donations
  • Groceries
  • Health and fitness
  • Home
  • Kids
  • Loans
  • Other expenses
  • Personal care
  • Pets
  • Shopping
  • Transfers and payments
  • Travel

You can also see how much you spend at a particular merchant over certain time periods, compare your income against your spending, cancel subscriptions and check your credit score.

The envelope budgeting system comes down to only spending what you have. And thankfully, you don’t actually need to put cash into envelopes to adopt this philosophy.

For today’s consumer, online tools can help you budget with the same mindset – and manage your finances holistically – with far less hassle. 

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This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.

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