Using Envelope Budgeting to Get Out of Debt

A mother and father sort envelopes

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It’s no secret that budgeting is the foundation to getting out of debt. One of the hardest parts about traditional budgeting is staying on budget, which requires you to track of how much you’ve been spending in each category. It can get time-consuming. For some people, the envelope budgeting system makes it easier to stay on track without all the cumbersome record keeping.

Envelope Budgeting With Cash

Here’s how it works. Create your paper budget, planning the amount of money you’re going to spend in each category for a particular period whether it’s monthly or bi-weekly. Pay your regular monthly bills as normal, by writing a check or paying online. For variable expenses – groceries, gas, entertainment, etc. – you’ll use your envelope budget. You’ll need one envelope for each budget category. Write the name of the category on the front of the envelope and place the allotted amount of cash in the envelope. For example, you may have $200 in the envelope marked groceries. When you make purchases, use the cash in the envelope for that category. Once the envelope is empty, you can’t buy anything else in that category unless you “borrow” money from another category.

Envelope Budgeting via Debit Card

One of the drawbacks of envelope budgeting is that it requires cash. If you receive your wages electronically, this may mean a trip to the bank to withdraw cash for your envelopes. You can fake the envelope budgeting system even if you prefer to use your debit card, but it requires a little (easy) math and some record keeping.

On each envelope, write the category and the amount of money you’ve allowed to that category. Say, the same $200 for groceries. Then, whenever you make a purchase, subtract the amount of the purchase from the budgeted amount. If you bought $45 in groceries you’d write $200-$45=$155. Do this each time you make a purchase in a category until it gets to $0. You can still “borrow” from other categories, too. Just make a subtraction on the category you’re borrowing from, e.g. Entertainment $100-$25=$75 and an addition to the category that’s borrowing the money, e.g. Groceries = $0+$25=$25.

We’re using the term “borrow” loosely because you don’t necessarily have to pay the money back to the other category. It just means you have less money to spend in the category that’s lent money.

Smartphone Apps for Envelope Budgeting

If using envelopes seems old-fashioned or like too much work, you can download an app like GoodBudget or Mvelopes, both which are available for iOS and Android devices. The benefit of the app is that you can check your balances anywhere on-the-go without having to shuffle through physical envelopes.

GoodBudget doesn’t sync to your bank account, which means you have to manually enter your transactions. This is actually a benefit for anyone who’s leery of allowing apps to connect to their bank accounts. Mvelopes offers more functionality and does sync with bank accounts (depending on the institution).

Both have free versions that offer a limited number of envelopes and subscription versions that increase the number of envelopes and other features you can access. For example, Mvelopes offers a debt elimination plan with their $10/month Premier account.

How Envelope Budgeting Helps With Debt

So how exactly does envelope budgeting help you pay off debt? The whole idea of envelope budgeting, or budgeting in general, is to get your spending on track, reduce your expenses, and to ideally have some money leftover at the end of each month to put towards your debt (or other financial goals once you’ve paid off your debt). If you’re not meticulously tracking your spending, you can easily overspend, particularly with your debit card because you don’t really have an idea of the impact of your spending. Envelope budgeting keeps everything separated and gives you a visual cue about your financial standing. You can easily tell when you need to curb your spending to stay on track with your budget.

At the end of the month, combine all the cash that’s left in the envelopes and put it towards a debt – your lowest balance debt, highest interest rate debt, or another debt you’ve selected for pay off. If you’re using cash-based envelope budgeting, you’ll have to either deposit it into your account and write a check or purchase a money order because you can’t pay credit card bills with cash. If you used your debit card instead of the cash system, then add up the balances left on each envelope, confirm this amount in your checking account, and write a check for the amount to one of your creditors.