The Envelope Budget

My last blog post discussed the surprising truth that not all budgets are bad.  They often have such a negative connotation, but hopefully you see the benefits of budgeting.  If you missed it, please click HERE to review that post.  Definitely worth an extra two minutes to shift your mindset on budgets.  Today’s blog post will focus on “The Envelope Budget.”


There is no single, magic budget that will work for all families.  Depending on your stage of life, level of debt, personal habits, and spouse’s habits, you may find one budget that will work better than another.  Your preferred budget may evolve as you become more financially responsible.  For those of you with older children, please share this article with them to enhance their financial readiness, too.



This plan is perfect for those starting on a path to good money management.  It is the foundational budget often suggested for new college grads but can be helpful for families who do not have a handle on finances.  It is simple to grasp: You can’t spend more than you earn.  Your net paycheck goes into a master envelope (think big manila folder) along with three smaller envelopes. 

1.     NEEDS

In this first envelope, set aside enough money for fixed expenses that MUST get paid – examples include rent or mortgage payment, utilities, transportation costs, insurance, groceries, and so on.  Aim for no more than 50% of your net earnings to go in this envelope.

2.     SAVINGS

Next, set a savings goal (e.g. 20%) and put that cash into this other envelope.  Do NOT use this savings envelope under any circumstance – take this one right to the bank so you can earn interest.  It may not be a big dollar amount now but you’ll be amazed at how fast this emergency fund can grow over time.  If 20% is too high of a goal, start off smaller at 10% and work your way up.  If you increase the goal by 2% each quarter, you’ll get to 20% in a little over a year! 

3.     FUN

This final envelope is designed to pay for all those other things you desire.  Dining out, recreation, concerts and shows, travel – you get the picture.  Once this envelope is empty, that’s it.  If you have to eat macaroni and cheese each night for a week, so be it.  You are NOT allowed to pull from the other envelopes.  The SAVINGS envelope is for true, unforeseen emergencies (e.g. job loss, broken appliance, etc.) and is only there as a back-up to cover your family’s NEEDS. 



Obviously, we are living in a modern age with technology.  So the idea of only carrying cash may not appeal to you.  In theory, you can apply this same concept online but may find it more challenging.  Having the physical cash that runs out – if only for a month or two – can be the sobering reality you need to get on track if you’re in debt or struggling to make ends meet.  If you do take this concept online, focus on automatic transfers and debit cards only.  Do NOT introduce credit cards at this point, as it will only distract you from your goals.  Mvelopes is a free app specializing in envelope budgets.


Please comment below with your feedback.  Have you used the envelope budget or something similar to it?  Was it very effective for you?  How long did you use it?


Forever faithful,

Deb Meyer, CPA, CFP® 

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