What is the Envelope Budget System? 

The envelope budget system is a popular financial strategy that makes it easy to keep track of your spending and help you save. This strategy is sometimes called the ‘Dave Ramsey’s Envelope System’ because while people have been using envelopes to budget for decades, the method was made more popular by financial guru and radio host Dave Ramsey. 

Traditionally envelope budgeting requires putting cash into physical envelopes but thanks to advancements in budgeting technology you can also set up digital envelopes which are more secure and just as effective. 

The envelope budget system is most commonly used for budgeting for the home but it’s also a great way to create a small business budget

In this article, we’ll explore the benefits of using the envelope budget system for your home and business and also give you clear, easy-to-follow instructions on how to get started.

Benefits of Using the Envelope Budget System 

The envelope budget system has been used as a way to manage money for generations. It’s a simple strategy but it really works. Here are some of the key benefits of envelope budgeting. 

Get a clearer sense of how you’re spending your money

Many of us don’t pay enough attention to how our money is being spent. By following the envelope budget system you’ll be forced to regularly take stock of your finances and see where you can make adjustments to your spending.

Easily save for the future 

Envelope budgeting makes it much easier to save and plan for the future. A goo tip is to set yourself a savings goal, like a holiday or a new car and think about this goal everytime you’re tempted to cheat on your budget. 

Practice discipline  

We could all benefit from a little more discipline. This envelope budgeting system will help you practice being disciplined with how you spend your money and can also help you extend the same practice to other areas of your life. 

Avoid spending money you don’t have

If you’re someone who’s always over-drawing your account or maxing out your credit card, the cash envelope system could be the perfect solution. With this system, you only spend the money you have set aside. This means no more overdraft fees or racking up credit card bills. 

How to Use the Envelope Budget System for Your Home 

The envelope budget system is a great way to get on top of your personal spending. You’ll be surprised by how much you can save when you’re paying attention to where your money is going. Here are some easy steps to get you started. 

1. Review your home expenses and divide them into categories

Before you set up an envelope budget system for your home, you’ll have to sit down and take stock of your expenses. Start by estimating your fixed expenses. These are regular payments that don’t change month to month like utilities, mortgage, and insurance. You’ll also need to figure out how much you’re putting towards other expenses like groceries, gas, and entertainment. 

2. Set limits for each category 

Once you have a list of categories you’ll need to set a spending limit for each category based on your monthly income. If you’re a little unsure of how to divide your money, a good place to start is by using a 50/30/20 budget. 50% of your monthly income should go towards ‘needs’ like rent and groceries. 30% should go towards wants like going out and travel. The final 20% should go to savings. The ultimate goal of budgeting is to help you save, so you want to be making sure you’re putting something away for the future.

3. Set up envelopes 

If you’re using the traditional cash envelope system, you’ll have to withdraw cash after figuring out how much you need for the month. Put that money into envelopes with the intended use written on the front. If you choose to use digital envelopes you’ll need a bank account or budgeting app that lets you have free, preferably unlimited sub-accounts (these can also be called buckets, pots, or envelopes depending on the product you use). 

Envelope Budget System categories for home
Envelope Budget System categories for home

4. Review and adjust every month 

Don’t be discouraged if you have to make adjustments after the first month, that’s all part of the process! The idea of the envelope budget system is to work towards having a clear and consistent budget that you are able to stick to every month, but this likely won’t happen right away.

How to Use the Envelope Budget System for Your Business

Using the envelope budget system for your business can help you better understand your expenses and how you spend your business’s income. Having a clearer idea of your finances will allow you to plan for the future and help you grow your business. Follow these simple steps to start using the envelope budget system for your business. 

1. Review and categorize your business expenses 

Like with the home, every business has different monthly expenses. The first step is to categorize these costs. This will mean looking over your spending from the previous year and breaking these costs down into categories. Start with your fixed expenses. These are the expenses that don’t change month to month. For example, if your business is a small restaurant, your fixed expenses will include things like, rent, insurance, and utilities. The other expenses are called variable expenses which include stock, maintenance, and payroll. 

2. Set spending limits 

For each category, you will need to decide on a spending limit. The idea is to only spend what is necessary for that category the remaining money is your profit. 

3. Set up envelopes 

Once you know what you’re going to spend money on and how much you want to spend it’s time to set up your envelopes. When it comes to your business, we recommend you set up digital envelopes rather than physical envelopes. NorthOne’s Envelope feature lets you set up an unlimited number for free. 

Envelope Budget System categories for business
Envelope Budget System categories for business

4. Separate your funds

Once your envelopes are set up, you’ll need to allocate money into these envelopes based on set spending limits for each category.  NorthOne’s Envelope feature lets you set aside money automatically on a schedule. This will save you having to manually divide your income into each envelope every month. 

5. Spend from your envelopes 

Use the money in each envelope to make payments related to that category. At the end of the month you’ll review your spending and make adjustments to your envelope budgets where necessary. 

Tools for Envelope Budgeting

For Home Budgets

If you’re going to use the cash envelope method for your home budget, all you really need is some envelopes that you can write categories on. For something a little more official, you can find a variety of envelope budgeting products on Etsy.  If you’d prefer to go digital with your budgeting there are plenty of personal budgeting apps available including Goodbudget and Mvelopes

For Business Budgets

If you want to try the envelope budget method for your business, we recommend opening a NorthOne account. NorthOne’s Envelope feature was specifically built to help small business owners budget and organize their money. You can set up unlimited Envelopes for each expense category. This feature also lets you set up rules to separate a set amount of money automatically on a daily, weekly, or monthly schedule.