If you’re looking for a simple but effective budgeting framework, the envelope method might be what you need.
This classic system offers a clear, hands-on way to manage your finances, whether trying to save more, cut back on overspending, or become more intentional with your money.
The best part? It can be done with physical cash or entirely digitally…whatever fits your lifestyle.
This is the fifth article in our Budgeting Series. Expand here for the others.
What Is The Envelope Method?
The envelope method is a budgeting framework that divides your income into specific envelopes by category.
Each envelope represents an expense/savings category with a particular purpose. Once you’ve spent the money in that envelope, you’re done spending in that category for the month.
Traditionally, this meant physical envelopes and real cash. Today, it can be done with digital envelopes through budgeting apps or banking tools.
Why Does The Envelope Method Work?
The power of the envelope method lies in how visual and tangible it makes money management.
Physical Awareness
Physically handing over cash, or digitally watching your “groceries” balance shrink, makes every purchase feel real…not just another tap of a card.
Limits Bring Freedom
Having clear and set amounts for each category frees you from guilt and stress. You spend confidently, knowing exactly how much you have available.
Instant Accountability
No complicated spreadsheets or guessing games. One glance at your envelopes tells you how you’re doing. It’s simple. It’s powerful. And most importantly, it works.
Physical vs Digital Envelope Method
The beauty of the envelope method (like most other budgeting frameworks) is that it can fit any lifestyle. Which version you choose is down to personal preference, but here are some pros and cons for each.
Pros of Physical Cash Envelopes
- Stronger Emotional Connection To Money: It’s psychologically harder to part with cash than to swipe a card. Physically seeing your money leave your hands makes each purchase feel more “real” and can naturally reduce spending.
- Immediate Visual Feedback: When you peek inside your dining-out envelope and see it’s getting low, you’re instantly aware that you need to adjust.
- Great for Curbing Impulse Buying: Carrying only the envelope(s) you need reduces the temptation to make unplanned purchases.
Cons of Physical Cash Envelopes
- Inconvenient for Online Shopping: If you shop primarily online (for groceries, entertainment, etc.), operating with only cash can be frustrating and turn you away from budgeting. (If you’re a chronic online shopper, this may be a pro.)
- Risk of Loss/Theft: Carrying cash has its risks. If it’s stolen or lost, the likelihood of you getting it back is slim to none.
- Not Ideal for All Bills: Some expenses (rent and utilities) are often easier to pay electronically.
Pros of Digital Cash Envelopes
- Perfect for Online Transactions: Whether ordering groceries, streaming movies or shopping for essentials, digital envelopes integrate naturally with your online lifestyle.
- Automation & Tracking: Most banking apps offer automatic expense tracking, reminders, weekly/monthly reports and even goal-setting features. These help you stay organised and accountable with minimal manual effort.
- Flexibility: Adjusting your budget mid-month (for emergencies or other changes) is as easy as a few taps.
Cons of Digital Cash Envelopes
- Can Feel Less “Real”: Watching numbers drop in an app doesn’t have the same emotional/psychological impact as handing over cash. This can make it easy to overspend if you’re not mindful.
- Temptation to Move Money Around: With digital envelopes, it’s easy to “borrow” from other categories with just a click. This can defeat the purpose if done often.
- Steep Learning Curves: Some apps offer various features that can be great once you learn them, but may be overwhelming initially.
Pro Tip: You Don’t Have To Choose Between Them
Many people use a hybrid system:
- Physical envelopes for discretionary/optional spending (dining out, entertainment, etc.)
- Digital envelopes for fixed and recurring expenses (rent, utilities, subscriptions, etc.)
This gives you the best of both worlds: visual control and convenience.
How To Set It Up (Step-by-Step)
The Envelope Method is one of, if not the simplest, budgeting frameworks to implement.
Step 1: Know Your Income
Write down your total take-home pay for the month, including side hustle income, dividends and other sources of regular income. This is the amount you will divide across your envelopes.
Step 2: Choose Your Categories
Use your current spending to determine your categories and where your money will go. The most common categories include housing (rent/mortgage), groceries and utilities. If you have other categories, include them.
Step 3: Set Limits for Each Category
Decide how much money each category should receive based on your current spending habits and future goals.
For example, if Sam earns £2,000 per month and is heavily focused on saving, his envelopes can look something like this:
- Rent: £1,200
- Savings: £500
- Groceries: £200
- Fun Money: £100
Step 4: Create & Allocate To Your Envelopes
Purchase and name each envelope (physical cash version) or use budgeting/bank apps to create spending pots (digital wallet version), then fill each accordingly.
Step 5: Spend Only What’s In The Envelope
Pace yourself and be intentional. Once an envelope is empty, that’s it until the next month. Financial clarity and freedom require discipline.
Common Mistakes & How To Avoid Them
The envelope method is powerful, but like any system, it only works if used consistently and thoughtfully.
Here are some of the most common pitfalls people fall into, and how to avoid them.
Not Being Realistic
Setting unrealistically low category amounts does more harm than good. When your envelopes are underfunded, you’ll quickly run out of money, get frustrated and feel tempted to cheat or abandon the system altogether.
How To Fix:
- Base your envelope amounts on your current spending habits first.
- Over time, adjust amounts gradually to ensure budgeting sustainability.
Ignoring Frequent Small Purchases
Not tracking small purchases because “Ah, it’s just £1” is the beginning of the end. These little expenses add up and can silently drain your envelopes (and financial life)…faster than you realise.
How To Fix:
- Make it a habit to track every purchase.
- Do regular check-ins and course correct when needed.
Treating The Envelope Method Like A Punishment
Associating budgeting with restriction and deprivation naturally makes you resist the process.
How To Fix:
- Change your perspective. Budgeting is about empowerment and creating a life that reflects your goals, values and priorities.
- Celebrate small wins. These can be things like staying under budget or saving for something meaningful.
Think of your budget not as a “strict diet,” but as a “menu” you designed yourself; full of options that help you live your best financial life!
Is The Envelope Method Right For You?
The envelope method is perfect for you if you:
- Struggle with overspending
- Want a simple, visual budgeting method
- Enjoy tracking your progress clearly and easily
It might not be ideal if:
- Your expenses change drastically month-to-month
- You do most of your spending online and dislike using apps
Still, most people find that even partially using the envelope method (e.g., for discretionary spending) improves their financial habits and attitudes toward money.
Rounding It All Up!
Whether you prefer the satisfying feeling of cash in your hand or the ease of tapping through an app, the envelope method gives you control, clarity and confidence over your money. You don’t need complex spreadsheets or to be an Excel wizard. You only need a system that works and the discipline to stick with it.
Ready to start?
Pick your categories, allocate your income, and take charge of your money…one envelope at a time.
