What envelope budgeting is
How envelope budgeting works
Who should use envelope budgeting
Why envelope budgeting is a good idea for seniors
Where to begin with envelope budgeting
What is the envelope budgeting system? And how does it work?
The idea behind envelope budgeting is simple: it relies on using cold, hard cash to manage your spending and savings.
In this approach, you liquidate your monthly income, then physically divide it into individual envelopes that represent specific types of expenses. (Liquidating your income means cashing your checks at the bank or withdrawing their value from an ATM.)
Once you spend the money in each envelope, it’s spent. You can’t add to it, and you certainly can’t subtract from it when the envelope is empty. However, if you have anything left at the end of the month, you get to decide whether to carry it over into the same envelope the next month, re-allocate it to a different one, or put it into savings. Who should use the envelope system?
Because it’s easy to learn, the envelope system can be a useful budgeting method for beginners of all ages—as well as for those who aren’t comfortable using spreadsheets, online banking tools, mobile apps, or other technologies to help them make and stick to a budget.
Even if you’re a budget pro, a cash-based system can prove surprisingly helpful in certain situations. If you tend to overspend on purchases when you use a credit card, for example, forcing yourself to use cash can keep you honest.
“With the envelope system, your money is truly real,” said Genevieve Waterman, NCOA's Director of Economic Security. “Unlike with credit and debit cards, you actually see and touch your dollars—which encourages accountability. And when you watch the thickness of your envelopes change in real time, you are more likely to think strategically about your spending decisions. ‘Do I truly need this? Or is it something that I want but can live without?’” Why should older adults use the envelope method of money budgeting?
According to data compiled by the U.S. Federal Reserve, 93 percent of people over age 60 own at least one credit card.1 And credit cards can easily lead to unintended financial consequences for many older adults who live on fixed incomes—as 72-year-old Franklin learned.
On the one hand, the convenience of credit cards—combined with the cashback awards, travel credits, and other perks that many of them offer—make them an attractive choice for recurring payments and purchases. On the other, unless you’re someone who is disciplined about their use—someone who keeps close tabs on every spending transaction and regularly compares your credit card balance(s) against your available monthly income and the other bills you need to pay—you may want to consider using a cash-based system. Especially, advised Waterman, if you currently carry credit card debt that you’re not sure you can pay down.