The Envelope Budget System (and a Critique) | BenFrank Money (2024)

Welcome to Part I of the BenFrank Money Personal Budgeting Strategy Series, designed to help you uncover the most compatible personal budgeting strategy to your working style and financial situation. As is often the case here at BenFrank Money, let’s wade into this (potentially new) topic with a definition.

I’ve seen the Envelope Budget System referred to online as “Traditional Budgeting”, “Budgeting 101”, or simply just “Budgeting”, and also heard it explained a half dozen different times and ways over the years. Like our good friends over at Wikipedia would suggest, let’s do a disambiguation of the Envelope Budget System right here.

The Envelope System of Personal Budgeting is the practice of forecasting the amount you expect to spend on predefined budget categories—housing, food, entertainment, etc.—then working to stick to this forecast.

Does this definition sound a little familiar? I’m hoping it does. The Envelope System is that “textbook” Budgeting System that a Martian man (or, of course, woman) would close his eyes and envision when someone from NASA asked him what Budgeting on Earth looks like.

So, now we know since there is quite a bit of fantastic (albeit terrestrial) literature already out there on The Envelope System, and since I don’t actually use this method myself, I’ll leave the raw evangelism and advocacy to my fellow personal finance blogger friends out there.

The BFM Mini-Soapbox Corner

BenFrank Money is designed to be a comprehensive personal finance blog with extensive coverage across any helpful and useful topic. Since the Envelope Budgeting System could absolutely be right for some people out there, I’ll absolutely cover it (like, here). However, since it’s the system most of us learned in grade school, and since I personally believe there are more effective personal budgeting systems out there, this Post is just intended to be a quick overview. This will be a consistent theme of BenFrank Money—full coverage, but a bit lighter on parts (1) you can get elsewhere or (2) I don’t believe as strongly in.

Who the Envelope Budget System could Work Great For

• Budgeters who are very detailed oriented and meticulous
• Budgeters who are/were A or A+ students
• Budgeters who are just starting out
• Budgeters who are naturally very disciplinedand self-motivated
• Budgeters who have simple spending habits
• Budgeters who want/need ample online resources

A Step-by-Step Look at the Envelope Budgeting System

Sure thing! Step-by-Step examples are what we do around here. Now imagine it’s March 1st, 2020 and you’re sitting down to Budget for the upcoming month. First, it’s worth mentioning that even without doing anything else, you’re already in the majority of Americans, since only 40% have any budget at all.

Next, since this is a Post about the Envelope Budget System, let’s, uh *sarcasm face emoji* , assume you chose to Envelope. So you get out your spreadsheet, pen & paper, or jazzy new app (I live in San Francisco, so way way more on technology recommendations later, stay tuned) and “forecast”—the art and science of making a prediction using a combination of historical data, expertise, and intuition—your upcoming monthly expenses. You consider two possible forecasting techniques:

1. Forecast from scratch – make a purely intuitive guess about your monthly spending by category
2. Forecast using carry over – use last month’s actual category expenses to inform this month’s forecast

Since you’re already a seasoned Enveloper, you decide it’s better (and you’d likely be right) to use the second technique, forecast using carry over. Accordingly, you start by identifying your actual within-category expenses from February. Next, you “carry over” (e.g. if you subscribe to Amazon Prime and Hulu, you plan to keep Amazon Prime and Hulu, and so on) February’s spending to create your “baseline”—starting point—March budget. Finally, you go through and make some minor adjustments (e.g. there are 31 days in March, not 28, etc.), ending up with something like:

<if you’re on mobile, turn your screen horizontally for optimal chart readability>

March 2020 Budget

Then, unfortunately, if you’re like most American budgeters—even the more seasoned ones—you stop here. You pat yourself on the back for doing this exercise, but then you:

1. Fail to stick to your budget
2. Fail to revisit your budget

For one sobering statistic, despite our best intentions, budgets, like New Years resolutions (or really any new habit for that matter), have an overwhelming 80%+ failure rate.

I’ll admit. I was that statistic. Like this forlorn clown, I’m in the majority who failed in my attempts to become an Enveloper. I live to tell about it, and have since successfully moved on to other fantastic and useful strategies (*teaser face emoji*) but again let’s absolutely still cover what a successful Envelope Budgeting System would have looked like in practice. Sound good?

How the Envelope Budgeting System Ought to Look

Great, so imagine you progress through the month the way you’re supposed to. Just like big John would do (if you have no idea who that is, or think he’s some half cousin of Papa, have a read/skim through the Introduction to The Personal Budgeting Strategy Series), you are supposed to use March’s budget forecast as an accountability and discipline mechanism to help inform your spending decisions throughout the month. For instance, if you need groceries and it’s March 25th, you’re supposed to see that you have only $100 remaining in your Food & Beverage allotment, so only allow yourself to spend up to this amount (i.e. pass on the organic cage-fed grass-free farm-raised Kefir).

Once you return from the grocery, you’re supposed to keep your receipt, then deduct the amount, say $98.58, from your remaining $100 in your grocery budget, leaving you with $1.42 remaining in the Food & Beverage category. If you’re in a bind (aka you get thirsty and it’s March 28th), you’re supposed to diligently and responsibly “borrow” from surplus categories. If you still fall short after borrowing, you’re only supposed to increase your total allotment “ad hoc”—on the fly—during the month as an absolute last resort.

Wow, I’m feeling enveloped in the plumes of stress smoke just writing about this! But again—and VERY IMPORTANT—maybe that’s just me. Oh, and if you have no idea why I just ended with this, again, have a quick read/skim (can skims be slow?) through the Introduction to The Personal Budgeting Strategy Series.

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