Our Financial Freedom: The Envelope System

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When I quit my job and began staying at home with my children, I needed to get a lock down on our expenses. Our income dropped by 50%–so we pretty much needed to get it together!

Couponing helped but I always felt the that I never actually “knew” how much I was spending every month. Then I discovered this system that got our spending together called the “Envelope System” This helps us see the actual cash and keeps us from over spending. Basically it works like this:

  1. Total up your monthly income
  2. Write a list of your monthly expenses and then write each expense on an envelope.
  3. Every time you are paid, split the money amongst the envelopes, make sure all expenses are covered
  4. Throughout the month spend like you should to cover the expenses
  5. If you find that you have run out of money in one envelope–you must take away from a different envelope-to make up the difference. OR you can simply do without.

For us..any left over money goes into our savings.

To Begin the Envelope system is pretty simple.

You must know your budget for the month. I usually sit down a couple days before the 1st and calculate everything that we are expecting.

Our family only has 5 different envelopes all labeled:

  • –Grocery
  • –Stockpile
  • — Clothing
  • — Entertainment (this has little separate envelopes inside a larger one labeled: Spending Money, Date Night and Eating out)
  • –Gas

I stick to a Grocery budget and never overspend because of this. Also, my Stockpile money goes to any great deals that I may want to stock up on (ie. Juice, Pasta) and leaves me feeling confident about saving money. This also challenges me to find ways to pay less out of pocket so that my stockpile money goes further.

Using cash makes the world of difference. You think twice about using cash vs using a credit card or your debit card. Cash just seems more valuable–so it tends to move slower.

Any other bills that we have come directly out of the bank via online bill pay. This is extremely hopeful because we do not need to sit and think about writing checks. We set the bills for the month–they are never late and we don’t have to worry about not having the funds to pay for them because we may have “overspent” on dinner last night. 😉

My list of envelopes above are expenses that I know that I can control. Things such as Electric and water–fluctuate and I can only do so much to control those expenses–so I leave that to the bill pay. You will be surprised at how much you save by using this method–I was shocked to realize how much we used to spend as a two-income family!

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  1. Claire says

    If you don’t mind me asking, how much do you budget for groceries and stockpiling per month? I’m working on my family budget but I’m not sure what is a reasonable amount.

  2. Briana says

    We use this system also. We have a few more catagories such as dogs, cat, gifts, and a few others that work well for us. Its been great for keeping things on track. And the extra $$ left in the envelopes gets used for a special treat for us or extra towards the mortgage!

  3. Angie B. says

    I started using cash only for grocery/drug store stops shortly after I started couponing and it works like a charm. I agree that physical cash seems somewhat more valuable, so I don’t use it nearly as quickly as I might if using my debit card. I still use my debit card for gas, but I have a monthly budget and since I don’t often drive more than to work and errands, it’s pretty easy to stick to it.

  4. Elizarae says

    Josie- thanks so much for posting! Where did you get your envelopes? I love that they’re see-through with the tabs!
    We started an envelope system with the beginning of this year to achieve our resolution of being credit-card-debt-free by the end of the year, and after only a little over a month, I’m amazed at how much extra money there is to pay off our credit cards when you actually see where your money goes (I’m talking hundreds of extra dollars a month)! Last year, in our first year of marriage we felt like we were living paycheck to paycheck while accumulating tons of credit card debt. We had put together a budget, which showed that we had plenty of money to pay bills and have extra money to spend…so we didn’t understand why we still had to use credit cards. Now that we’re on the envelope system, not only do we have enough money to meet all of our financial obligations AND have money for date night and fun stuff, but we actually have money to pay down the debt! The envelope system forces you to be cautious about what you’re spending your money on and makes you stick to your budget. We cut up all our credit cards and only use the debit card for gas. I love it!

    • robert says

      I do not like the idea of always having the cash one you. who would have the money the husband or wife and I think another good point it to have the money at home if you left the house not expecting the spend money then you probable do not need to buy anything. If you really want it then u need to go back home get the money and come back this step will stop you from buying things you don’t need. My wife and i just carry our monthly allowance. if you are going to ralphs and say petsmart we take what we think we need or want to spend this also stops over spending. but nice pretty idea just with out it being in the wallet.

  5. Lyndsey says

    This is great! It really helps to know that other people are in the same boat when it comes to being on a strict budget. I’m jealous of the date night envelope! My husband and I have been out of the house less than 20 times together since our first son was born 11 years ago. And three of those times out was to go to the hospital to have our three other sons!! lol.

    I’d love to see your stockpile, btw.

  6. bre says

    Good idea!! Everyone needs to find a system that works for them. My husband and I each give ourselves an allowance every week. We can spend it on whatever we want or save. I don’t care what he does with his and vice versa. I choose starbucks =) and he buys parts for his car. I am a spreadsheet nutball so I keep track of my spending for couponing. I input all transactions, amount saved and how much under my set budget I am. How you handle your finances is based on your behavior. You have to figure out a system that works for you and stick to it =)

  7. Chanel says

    There is also a great budgeting envelope system on crown.org called mvelopes. This is for people like me who do not like to carry cash. All your transactions go to the envelopes and you fund the envelopes with your bugeted amount. When you put the transaction in the envelope it tells you how much you have left for the month down to the penny. This keeps all my transactions and lets me do everything electronically with my debit card. I like the convienance of being able to do it from my phone,computer or iPad! It has saved our family hundreds!

    • Daisy says

      Thanks for the tip! That sounds like it might work for us since we benefit from using our debit cards (we get cash back deposited in our account at the beginning of the next month and also get points that we use for movie theater and restaurant gift cards, I’m also getting the Target debit card to save the additional 5% there.I like when my money makes money!)

  8. says

    we do that! =)

    it hurts to pay with cash. i’m glad i coupon so i feel good about spending cash. plus the kids see that money is real and it hurts to blow it.

    thanks for sharing this.

  9. Sonia says

    @Elizarae – I found these exact folders at staples today. They are actually Avery brand Pocket Tabs 5 1/8″x8 5/16 and come in a five pack.I found them located next to all of the dividers. If can be fixed to the dividers, or if you choose, you can remove the sicky backing(which I did). This will make them completely clear. Hope this helps!

    • Sarah says

      I can’t find these. I only see Pocket tabs that are half pockets. Can you be more specific as to which type they are?

  10. Patty R. says

    This is much like the way my grandfather managed his money. As a child, I would watch as he would divide his monthly earnings amongst envelopes he had labeled in his sock drawer. Each envelope was either savings, annual or monthly bill. He would divide the annual ones by 12, perhaps car insurance, home ins. or if he was just saving for something special. Even if it was just a few dollars and cents each month, the exact amount would go into the envelope. Then when the bill came due he proudly grabbed the envelope and paid in cash! My grandparents were never in debt, I learned a lot from them!

  11. Sarah says

    I’m super motivated to try this system! Any suggestion on how to stray from over-allowance in entertainment? Should it be calculated according to a certain percentage of ones income?

    Thanks so much for your tips. You’re simplifying my life and I <3 you for it.

    • says

      It really just depends on how much you can afford. My husband and I need to pay a babysitter, so ours is usually more than most people. :( But it really is up to you!! :)

    • angela says

      in entertainment it’s not as difficult to manage as I thought it would have been. we pick a movie we would all like to watch paying attention to trailers and we go once every six months and add the popcorn and drinks in. get a groupon for costco or samsclub and get their movie ticket packet discounted by the groupon. use it like a coupon and i barely pay for two passes so its really like getting the munchies all for free. I subscribe to netflix and amazonprime which can be accessed from mobile units like phones, tablets, laptops, or even from the video game consoles if you have kids so no extra equipment required for purchase. We do a movie night ever couple weeks. make my own caramel, make a pizza or calzone thats loaded with veggies,meats and cheese and if I had it my way I would make my ice cream but I just haven’t found a good maker for a descent price yet. dreyers it is for vons or FFL for 2.48. Hulu is a consideration for TV series if you want to bypass HBO and such for the network tv series and its good quality footage. granted its 7.99 each feature a month but we save hundreds between the savings on movies tickets, junk food, gas and everything else that adds up. we also chose home game nights where no tv is allowed and pick a game, like scrabble, uno, other card games, tv trivia, etc and it makes up quite a bit. we save up for that extravagantly expensive. trip like disneyland and do one large trip to splurge on a year. Southern Cali discounts are a blessing because they don’t do that in Northern Cali. in the short term we determine how much we would spend now versus what we would spend if we went one more time- spend the extra $10-30 a person to upgrade to unlimited ONLY if you are a habitual visitor and don’t ever get an annual pass unless you know it will be used. Every penny counts and balance the benefits. I also stack my savings at Staples for entertainment things I can do at home another day and splurge with my rewards on software games for those rainy days in the house.i dont know if that helps but those are things we do in our home and everyone gets involved in the savings so everyone benefits and appreciates where things go moneywise. My 9-yr old starting lining up coupons and now realizes how much money we use to waist on even things like go-gurt. get the family involved. eventually someone will appreciate it- maybe not till they go shopping in your garage instead of the store, but its worth the effort. Good Luck

  12. Monica says

    I’ve found the envelopes at the $.99c store. I use them to seperate my drugstore rewards that way I can see upcoming expiring ones since the front is clear.

  13. BIll says

    Please give credit to your envelope system to Dave Ramsey, as I am sure that is where you got this envelope idea. He created this system and has become famous for it. Seems like you are taking credit like this was your creative idea. lets please keep the plagiarism to a minimum. This is your responsibility as a so called blogger.

  14. Amanda says

    L I just use the envelope for survey money, other stuff I do online for money, and my personal face is the money that I find as I’m out in town doing errands. I won’t walk past even a penny if I see it! Lol. I have saved a lot in the envelope. Every time I’m paid from my sites and things that I found to make money with, I cash it out and let it get sent by either check or PayPal (whichever the company pays with) and if a check I cash that on way to do errands. If PayPal I transfer my money from PayPal to checking account and when it gets there I just wait until errand day or catch a ride with someone going to town, and then use the atm that’s free that I found and that money goes in my save envelope. Free to make the money, free to acquire the money from the atm, all it cost was about 12 miles in gas round trip for my errands and getting my money. Do it only 2 times a month. So I turn a straight up profit to save :)

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