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How the Envelope System Works: The Pros and Cons

May 4, 2018 | Daniel Dewitt

 

What is the envelope system? Chances are you’ve heard the name at some point, but maybe don’t really know much about it. If so, that is a pity because the envelope system is one of the simplest and most effective ways of budgeting your money. Essentially, the envelope system requires that you withdraw all the money you will need for your expenses at the beginning of the month, and place it into corresponding envelopes with the categories written on them. The cash in these envelopes is then everything you’re able to spend in that category for the remainder of the month.

It’s a straightforward but nuanced system with definite pros and cons, just like any budget. And those advantages and disadvantages are what we’re here to look at today.

Pro: It Places Hard Limits on Your Spending

With the envelope system there’s no ambiguity or wriggle room: once you’ve spent the money in the envelope, you’re going to have to wait until the month is over to spend any more in that category. While for the first couple months you’ll often find yourself spending all the money in your envelopes too early, you will quickly learn to pace your spending, which is a valuable lesson for all of us to learn.

Con: It Doesn’t Handle Emergencies Well

This is the flip side of the pro listed above. The envelope system is by design rigid and inflexible, so when an emergency hits it can cause the envelopes to scatter into disarray as you have to pull money out of other spending categories to deal with the sudden spike in spending the emergency demands.

To combat this issue, often people will create a dedicated contingency fund envelope they add a set amount to each month that can only be spent in the event of an emergency. A short term payday, title, or installment loan is another way people help bridge the gap during unexpected expenses.

Pro: It Makes Your Finances Concrete

One major upside of the envelope system is that it makes your finances concrete and tangible in a way that graphs and bank statements don’t. Too often our understanding of our own finances can be abstract and difficult to wrap our minds around. With the envelope system the cash is right there in front of you in a way that’s very easy to grasp.

Con: It’s Only As Good as You Are

Ultimately the greatest weakness with the envelope system is the same flaw that almost any budget has: you. If you’re unwilling to commit to the system then there’s no way it can force you to comply. If you cheat and spend money that isn’t in the envelope, you’re ultimately only accountable to yourself. A particular problem with the envelope system though is that once you start trading money between envelopes you’ve complicated the whole system and will quickly throw the whole structure into disarray.