The Envelope Budget: How to Make It Work for You

An oldie but goodie, the envelope budget is a great place to start for beginning budgeters. Here’s how it works.

A green envelope
(Image credit: Getty Images)

My last blog post, Don’t Be a Budget Hater, discussed the surprising truth that not all budgets are bad. They often have a negative connotation, but hopefully after reading the article, you see the benefits of budgeting. Now we will dive into different types of budgets.

One Size Doesn’t Fit All

People often assume that there is one budget that will work for everyone. Unfortunately, that is not the case.

There is no single, magic budget that will work for all families. You may find one budget will work better than another — depending on your stage of life, level of debt, personal habits and your spouse’s habits if you are married. Your preferred budget could also evolve as you become more financially responsible. If you parent a young adult, please share this article with them to enhance their financial readiness.

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Before you start budgeting, it is important to revisit your values and goals. Read this related article, 5 Steps to Reaching Family Goals. Budgeting is a process, and it always comes with trade-offs. If you value having a large house in a well-kept neighborhood for your growing family, you will likely have to compromise on entertainment costs. Similarly, if your No. 1 goal this year is to pay off debt, you may have to forgo vacations and dining out. Understanding your family values and goals is foundational to budgeting.

There are two primary types of budgets: The envelope budget and the detailed budget. Let’s focus on the envelope budget today.

The Envelope Budget

An envelope budget is the foundational budget often suggested for new college grads but can also be helpful for parents who do not know where their money is going. This type of budget is perfect for those starting on a path to good money management. The concept behind the envelope budget is simple: You cannot spend more than you earn. Your net paycheck goes into a master envelope (think big manila folder) along with three smaller envelopes, labeled NEEDS, SAVINGS and WANTS.


In this first envelope, set aside enough money for fixed expenses that MUST get paid. For instance, allocate rent or mortgage payments, recurring auto or student loan debts, utilities, transportation costs, insurance and grocery expenses to this NEEDS envelope. Christian parents who tithe may want to consider charitable giving in this envelope as well. Aim for no more than 50% of your earnings to go in this NEEDS envelope.


Next, set a savings goal and put that cash into this envelope. It may be 10% of your net pay or a fixed dollar amount. Do not spend this SAVINGS envelope on any regular expenses under any circumstance — take this one right to the bank so you can earn interest. It may not be a big dollar amount now, but you’ll be amazed at how fast your emergency fund or opportunity fund can grow over time. No savings goal is too low. Build momentum and use pay increases to increase your savings rate.

If you are trying to quickly pay off high-interest credit card debt, it may be advantageous to pull money from this envelope for that purpose, but only after you have established a small emergency fund. Focus on this SAVINGS envelope for principal payments above and beyond the required minimum credit card payment.


This final WANTS envelope is designed to pay for all those other things you desire. Dining out, recreation, concerts and shows, travel — you get the picture. Once this envelope is empty, that’s it. If you have to eat macaroni and cheese each night for a week, so be it. You are NOT allowed to pull from the other envelopes. The SAVINGS envelope is for true, unforeseen emergencies (e.g., job loss, broken appliance, etc.) and is only there as a backup to cover your family’s absolute NEEDS.

Your family values and goals should influence the amount that goes into this WANTS envelope. I intentionally listed the NEEDS and SAVINGS envelopes before this WANTS envelope. If you allocate to the WANTS envelope first, you may not have enough money left over to pay true needs or to fund your saving goals.

The Envelope Budget If You’re Tech-Savvy

Obviously, we are living in a modern age with technology, and the idea of only carrying cash may not be appealing. In theory, you can apply this same concept online but may find it more challenging. Having the physical cash that runs out — if only for a month or two — can be the sobering reality you need to get on track if you are in debt or struggling to make ends meet.

If you do take this concept online, focus on automatic transfers and debit cards only. Do not introduce new credit card charges at this point, as they will only distract you. Mvelopes is a free app specializing in envelope budgets.

Once You’ve Graduated from the Envelope Budget

At some point in time, you will master the envelope budget and “graduate” to a new level. Graduation occurs when you are earning enough to fund lifestyle needs and save at least 10% of your income each month. You become interested in maximizing savings and tax-efficiency. My subsequent blog post on the detailed budget will be extremely beneficial to you, as we carefully dissect each of the spending and saving categories.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Deborah L. Meyer, CPA/PFS, CFP®
CEO, WorthyNest LLC

Deborah L. Meyer, CFP®, CPA/PFS, CEPA and AFCPE® Member, is the award-winning author of Redefining Family Wealth: A Parent’s Guide to Purposeful Living. Deb is the CEO of WorthyNest®, a fee-only, fiduciary wealth management firm that helps Christian parents and Christian entrepreneurs across the U.S. integrate faith and family into financial decision-making. She also provides accounting, exit planning and tax strategies to family-owned businesses through SV CPA Services