Calls to “shop small” and “support local business” have gained wide followings on social media. But anyone inspired to answer the call should remember that when you buy local from small businesses and pay with a debit or credit card, you’re still lining the pockets of big financial companies.
With each swipe and tap of your payment card, retailers pay processing fees as a cost of doing business—and they pass the costs along to your as higher prices. According to the Merchants Payments Coalition, payment processing fees removed over $27 billion from the coffers of retailers across the country during the 2024 holiday season alone, and $172 billion for the full year in 2023.
“Inflation is coming down but swipe fees keep going up, taking a bigger slice out of what it takes to put presents under the tree,” said Stephanie Martz, MPC Executive Committee member and National Retail Federation chief administrative officer, in December 2024.
The payments industry remains embroiled in a decades-long suit to lower payment fees, and Congress has been debating legislation to help ease the burden. Meanwhile, more and more retailers are offering discounts for cash purchases, making this a great time to learn about envelope budgeting to help you save money.
The envelope budget can help you save money
If you’re anything like me, it’s been a while since you regularly kept cash on hand. According to research from Capital One, fewer than 20% of Americans use cash for more than half of their purchases. Ubiquitous debit cards, plus the spread of cashback credit cards and buy-now-pay-later apps, make it clear why cash is no longer king.
Here’s the thing: The ease of use of modern payments technology is not free, but the costs are concealed from average users. According to the MPC, individuals and families paid an average of more than $1,100 in 2023 just for the privilege of using a debit or credit card.
Envelope budgeting is one way to keep some of that money in your own pocket. At its core, this budget strategy offers a hands-on approach to managing your money. Instead of relying on credit cards or digital transactions, you use cold, hard cash to cover all your expenses.
Here's how it works:
- Divide your monthly income into different spending categories: Expenses, wants, needs.
- Give each category its own physical envelope and monthly spending amount.
- Fill each envelope with the allotted amount of monthly spending cash.
- When you need to cover expenses in a particular category, pull cash from the right envelope.
- Once an envelope is empty, no spending in that category until next month.
It's a straightforward concept, but don't let its simplicity fool you. This method can be incredibly effective at helping you control your spending and stick to your financial goals.
A 4-step plan for learning to use the envelope budget
If you’d like to implement envelope budgeting as part of your own personal finance game, here’s how to get started with four easy steps.
Step 1: Understand your monthly income
The first step in making a budget is always to fully grasp how much money you’re making. Add up all your sources of income for the month, including your regular paycheck, earnings from side hustles, investment income, or other regular payments you receive.
Step 2: Identify expense categories
Next, think about how you spend your money each month. Common categories might include:
- Rent or mortgage
- Utilities
- Groceries
- Transportation
- Entertainment
- Personal care
- Savings
- Miscellaneous
Don't forget about irregular expenses like car maintenance or annual subscriptions. It's a good idea to set aside money for these in separate envelopes too.
Step 3: Allocate your funds
Now comes the fun part: Deciding how much to put in each envelope. Start with your essential expenses like housing and utilities. Then, move on to variable expenses like groceries and entertainment. Be realistic about your needs and wants, but also look for areas where you might be able to cut back.
Here's an example of how you might allocate a $4,000 monthly budget:
- Rent or mortgage: $1,200
- Utilities: $400
- Groceries: $500
- Transportation: $200
- Entertainment: $300
- Personal care: $100
- Savings: $500
- Miscellaneous: $800
Once you've decided on your categories and allocations, get cash and start stuffing those envelopes. Some people prefer to do this all at once at the beginning of the month, while others might do it with each paycheck. Choose whatever works best for your pay schedule and financial habits.
It’s important to note that some of these categories are impossible to cover with cash. Few people can just stop by the bank and pay their mortgage in cash. Rent, utilities, and other services are very seldom candidates for cash payments. The reality is that many common transactions cannot be covered in cash, and you need to account for them in your planning.
Step 4: Adhere to your goals (and know when to be flexible)
As you go about your month, use only the cash from the appropriate envelope for each purchase. When you're out of money in a particular envelope, that's your cue to stop spending in that category until the next month.
Who is envelope budgeting best for?
The envelope system isn't a good fit for everyone. It works best for people who:
- Have a low credit score or don’t want to use credit cards
- Struggle with overspending and want to establish better habits
- Prefer a hands-on approach to money management
- Are comfortable using cash for most transactions
- Want a clear, visual representation of their budget
- People who enjoy “off-grid” living
If you’re a fan of using credit cards for cashback rewards, are a frequent traveler, or don’t make many of your transactions in person, you may want to try a different strategy such as the 50/30/20 budget rule.
But if you find yourself constantly overspending or losing track of where your money goes, or simply want to save money on transaction fees, the envelope system might just be the financial wake-up call you need.
Advantages of the envelope budget
- Helps you control spending and avoid overspending
- Makes budgeting more tangible and visual
- Great way to avoid overdraft fees and credit card debt
- Effective for people who struggle to stick to a budget
Disadvantages of the envelope budget
- Can be very challenging to use cash to cover all expenses
- Risk of losing cash if envelopes are misplaced
- May be challenging for couples to coordinate
- Cash doesn't earn interest
The takeaway
If you decide to give envelope budgeting a shot, you might be surprised at how such a simple system can transform your financial life. Not only will you be saving money on swipe fees, but the physical limitations of cold hard cash can help prevent you from overspending when you shouldn’t.
Remember, the goal of any budgeting system is to help you take control of your finances and work toward your financial goals. Whether you use physical envelopes, a digital app, or some combination of the two, the key is finding a method that works for you and sticking with it.
Kim Porter contributed to this article.
