Envelope budgeting method, envelope with money in it for groceries.

7 Pros And Cons Of The Budget Envelope System

Victoria Araj5-minute read
December 14, 2020

Last month, my wife Nicole and I agreed to participate in a little personal finance experiment. We’d use the budget envelope system for 1 month and see how it would affect our monthly spending habits.

For some context, the budget envelope system is a cash-only, personal-spending strategy. Savvy budgeters use this system by allocating a certain amount of actual dollars to individual categories and then placing them in envelopes for monthly spending. These categories can be things like groceries, restaurants, clothing, entertainment or any other area of common household spending. 

Since Nicole and I had been using credit cards as our preferred purchasing method for the past 3 years, we expected this change to trip up our typical swipe-and-buy lifestyle. On the other hand, we agreed that it was getting harder to stick to our monthly budget with our busy schedule as young parents. Maybe, just maybe, this experiment could do us some good and help us hit some of our future savings goals.

In the end, we discovered a series of positives and negatives with the budget envelope system. Here are seven pros and cons that we discovered from 1 month of living the cash-only way.

Con: Harder To Track Our Spending

For the last 7 years, Nicole and I have used Mint to track our monthly expenses. It’s a free, online budgeting tool that automatically imports our expenses from our bank or credit card. When we did this experiment, tracking our spending became a lot more difficult.

With no automatic import of our data, we relied on collecting receipts, writing down our expenses and subtracting them from our envelope totals. For example, our groceries envelope contained $600 for the month. When we spent $129.14 at Aldi, we subtracted that amount from the total so we’d have a running tally of where we stood.

Now, this wasn’t massively difficult. It was just minorly inconvenient. But when you’re a busy parent with a thousand to-dos on your list, it’s a pain to physically write down each of your expenditures to ensure you don’t go over budget. And sometimes we’d be in such a rush that we’d lose a receipt or forget to write down the expense. Tracking our spending just became more difficult for us with the cash envelope system.

Pro: Easier To Save Money

Because we knew we had a specific amount in each envelope, both Nicole and I planned our spending accordingly. If we were using credit cards, we might’ve been tempted to slightly overspend.

As we were rehashing the experience, Nicole discussed the clothing envelope. She said to me, “If we had been using credit cards, I would have bought clothes that totaled just above the $100 mark, like $110 or $120, because it was close enough. With the cash envelopes, the lack of additional cash made me want to shoot under the spending limit. So, I only ending up spending around $95.”

When you add that type of reaction to the dozen or so envelopes we had, it made for a truly “forced savings” win. We ended up saving $250 by the end of the month-long experiment.

Con: Holding Cash Made Us Feel Uncomfortable And Unsafe

When Nicole and I went to the bank and walked away with $2,000 in our hands, we felt incredibly uncomfortable. Carrying around that much money made us both feel vulnerable to theft and even the possibility of us losing some (or all) of it.

I know how quickly and easily I lose my keys, so it was completely feasible for me to lose an envelope full of cash. And unlike my keys or cell phone, I’m thinking someone would be less likely to return a fat stack of $20 bills they found on the ground. Call me cynical, but I don’t think hundreds of dollars normally sit around the lost-and-found for too long. Typically, when you lose a credit card, you can easily cancel it and any unauthorized purchases are reimbursed. That’s not the case with physical cash.

Pro: Our Monthly Spending Amount Was Eye-Opening

Despite the downsides, our bank experience did have a positive effect on us, though. When the teller was physically counting out $2,000 in $20 bills in front us, it made us realize just how much we were spending each month. All of our budget envelope expenses aligned with our priorities and that definitely made us happy, but seeing that much money was eye-opening.

There’s something about seeing the money in front of your eyes and holding it that makes it harder to spend it. We work so hard for this money each month, and to just let it go was difficult.

Con: Inconvenient And More Time-Consuming

There were multiple occasions where I’d forget an envelope at home. I’d normally just throw my purchase on a credit card and not think twice about it. But for the purpose of the experiment, I’d turn around and drive back home to get the envelope. Sometimes I ran out of time and just didn’t buy the thing I was ready to buy.

I could’ve kept the envelopes in my car or my pocket so I wouldn’t forget, but then my feeling of uneasiness would come back because I was carrying so much money on me. It was quite an inconvenience when I was hungry at lunch time. I don’t do well when I’m hungry!

Pro: Easier To Swap From One Category To Another

Unlike online budgeting systems, the cash envelopes were pretty easy to swap and borrow from as our month was coming to a close. When we realized we were going to be $100 under budget on our groceries, it was easy for us to move that money over for some additional back-to-school shopping for our kids.

If we were doing this online, we’d have to transfer money from one line item to another. This typically creates additional budgeting homework for us, so moving cash between envelopes was a welcomed change.

Con: Cash Isn’t Accepted Everywhere

There were two specific instances during the month where I realized cash isn’t always accepted. I like to get my gas filled up at Costco because of the slight discount you receive per gallon as a member. Unfortunately, Costco Gas doesn’t accept cash.

Another instance of the all-cash plan not working out was when I was looking for a parking space before meeting some buddies for lunch. I ended up finding a great parking spot right in front of the restaurant, but the parking meter only took credit or debit cards. Those two instances had me thinking that cashless society is slowly taking over.  

In Conclusion

As mentioned earlier, we ended up saving $250 for the month. That’s a lot of money. We can’t deny the power of physically holding and managing your cash. We were compelled to save. 

Even so, Nicole and I both agree that we still love the convenience of using our credit cards. The time spent manually calculating our expenses or driving back and forth when forgetting an envelope was too much for us. And let’s not forget about the credit card points we didn’t receive during this experiment.

Honestly, our preference of using credit cards over cash comes from a position of privilege. Since we’re completely debt free and we have a 6-month emergency fund in addition to a stable monthly income, we feel we can use credit cards as a luxury convenience even if it may cost us a bit more. If we were to lose our jobs or suddenly come into debt, we both agree that we’d go straight to the budget envelope system to get ourselves out of our sticky situation fast.

Perhaps the ultimate middle ground to credit cards and the budget envelope system is the debit card. You’re spending real cash with the conveniences of a credit card. So, who’s up for another experiment?

Everyone’s money situation is different. Be sure to speak with a financial professional about yours before making any big spending decisions.

What do you think about the budget envelope system?

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.