How to use envelope budgeting with and without savings accounts

Young man opens paper envelope while using envelope budgeting method.
October 26, 2022 | Lois Sullivan

Creating and sticking to a budget can be challenging, regardless of your financial situation. But learning to budget and live within your means can help you achieve financial stability and success. If you've struggled with different budgeting methods in the past, you might want to consider another option, known as the “envelope method.” This budgeting technique uses cash and paper envelopes so you can better focus on your expenses and cash flow.  However, it is also adaptable to your smartphone or laptop – digital savings accounts act as your “envelopes” – making it easier to monitor your spending wherever you are, with an added benefit of earning you some interest.

What is envelope budgeting?

A budget records an individual's spending habits and income earned over a specific period. Although many individuals struggle with debt and living within their means, learning to create and adhere to a budget can help individuals overcome these challenges and enjoy financial freedom. Depending on your financial situation and how you typically spend money, you may have tried other budgeting methods, such as manually tracking your expenses or looking at what you spend over a year.

One option to consider is envelope budgeting, which takes a cash-based approach to money management. If you struggle to stick to a budget when using a debit or credit card, this method may be a good option as it requires you to use cash. For many people, using cash to make purchases feels quite different than making purchases with a card, as paper bills make them more mindful of their spending. When the money is gone, they also can't continue to spend unless they take out more cash, which requires more effort.

What is a savings account?

A savings account is a deposit account offered by a financial institution, such as a bank or credit union. Most savings accounts offer slightly higher interest rates than checking accounts, making them appealing for short-term saving goals. A savings account may have a minimum balance requirement and withdrawal limits. Still, the money within the account is liquid or accessible if needed. Savings accounts are also reliable and trustworthy for cash storage, as the federal government backs the funds up to $250,000.

Benefits of envelope budgeting

When you pay for something with a credit or debit card, you likely won't see the money come out of your account for days or even months. But parting with your hard-earned cash feels different, which is why the envelope budgeting system can work for people who have difficulty sticking to a traditional budget. When you look in the envelope for each budget category, you'll see a visual representation of what you can spend. And when the money is gone, it's gone —and you can't trick yourself into thinking you can afford to keep spending.

Envelope budgeting is a more straightforward way to track your expenses, especially compared to other budget strategies. You can note each expense on the monthly envelope and see what's remaining in each category.

Another benefit of using this budgeting system is that it can save money. If you've ever overdrawn your account, you know that the penalty associated with this financial error can be costly. You can avoid overdrawing your account and the associated fees by only spending what you have available in cash. When you're shopping, you'll also face limits on what you can pay to how much you have, which can keep your habits under control.

Setting up the envelope budgeting system

If you decide to try the envelope budgeting system, start by getting multiple envelopes and following the steps below.

Designate each envelope with a different category

Each envelope represents a different category in your budget, such as groceries, clothing, personal care, dining out, automotive expenses, household items and gifts. You may have some categories you can't pay in cash, such as your monthly rent or mortgage, utility bills and insurance. These amounts usually remain fixed throughout the year, so you can generally account for them without overspending.

Add up all your income

You can include income from your main job, any side or part-time jobs you may do, and alimony or child support, if applicable. Subtract your fixed expenses from this amount to get the remaining balance for your envelopes. You may also want to look at your credit card and bank statements over the past few months to get an idea of your spending in each category.

Get cash for each envelope

After determining the amount for each category, head to your bank or a fee-free ATM and take out cash to place in each envelope each month. When you want to buy something from that category, only use the money within the envelope and record what you spent. If you're out of money, you'll have to wait until next month to make that purchase, or you can take cash from another envelope to cover the cost. However, borrowing from other categories can leave you short in another area, so be mindful.

How to use envelope budgeting with savings accounts

If you feel, like many, that digital technology has long outgrown paper envelopes for monthly expenses, you can leverage online savings accounts as your “envelopes.” With this digital approach, you’ll save time and eliminate the hassle of getting cash from an ATM each month (the step that often stops some people from sticking to their budget). Additionally, since online savings accounts still require steps to move or withdraw funds, you will remain mindful of your spending and keep it in check. Best of all, you can earn interest while keeping your spending in check.  Here’s how.

At many financial institutions, creating online savings accounts are free. For example, members of Alliant can create up to 19 additional supplemental savings accounts to better help them budget. Either ask to name your accounts with the names of your spending categories, or rename the accounts yourself within your institution’s online or mobile banking app.

High-yield savings accounts make great spending categories because they are designed to be separate from emergency funds or other savings accounts you’ve designated for longer-term savings goals, so you’re not tempted to dip into those categories.

The process of placing cash into envelopes can be completely automated with your credit union or bank’s online and mobile applications. In other words, you can send the amount for each spending category from your checking account into each savings account after you receive a paycheck. You can then easily monitor when you’re approaching your spending limit.

Over time, when you have a better grasp of what your expenses look like, you can set up automatic transfers from your checking account after each paycheck to send the amount of your spending budget into each assigned sub-account. If you find that you’re constantly withdrawing funds to pay for irregular expenses like property taxes, holiday costs or even car insurance premiums, you can setup additional supplemental savings accounts so you can ensure that your savings funds keep growing while you still have money allocated for one-off expenses.


With either the paper envelope or savings account method, review your budget often and adjust. Maybe you refinance your car loan and your payment goes down, or you start earning more money in the new year. Every good budget requires adjustments so that you can reallocate extra money to debts or savings.

Using either form of budgeting can benefit you and help you reach your financial stability and independence goals.  Alliant can help. Alliant offers high-yield checking and savings accounts that allow you to make transfers and manage your money more efficiently.

Read more about budgeting and saving:

You might like

Sign up for our newsletter

Get even more personal finance info, tips and tricks delivered right to your inbox each month.