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The Envelope Budget: No Licking Necessary

Finding a good balance between spending and saving can be the difference between meeting your goals or falling short. Creating a budget can help but may be a little overwhelming or cause uncertainty when you’re starting out.

Am I saving enough?

Is everything adding up?

Will this improve my credit?

Questions like these are sure to pop up, but creating or updating your budget doesn’t have to be scary. Let’s see how the envelope budget method could give you confidence and help you achieve your goals.

How it works

With this cash-based budget, you physically watch the money leave your possession and have to make the money left in the envelope last. The planning and mindfulness used to set up and follow this budget can lead to a better understanding of the balance between income and outgoing expenses.

  • Who: Visual learners; those who want tangible interactions with purchases; planners
  • Why: To increase awareness on spending habits; reduce unnecessary spending
  • Pros: Easy to use; know exactly where your money goes
  • Cons: Have to keep track of envelopes; requires regular trips to the ATM or bank visits to access cash

We’ll walk through the steps of how to create and use the envelope method, and then take a look at how an example budget can be used to track expenses.

Creating an envelope budget

  1. Review your current spending habits. Analyze the past few months’ expenses to determine what your average spending looks like. From here, it’s easier to see how much you spend on necessary items like housing, car payment, food and utilities, and what you spend on wants or entertainment.
  2. Categorize your expenses and set target spending goals. Each category, like groceries or hobbies, will get its own envelope, which will be filled with the cash you allot from your spending goals.
  3. Withdraw cash from the bank or ATM. Some fixed expenses, like a mortgage payment that’s the same amount from month to month, might be easier to pay online and can help build your credit score. Pay these expenses online, and then withdraw the rest of the cash you need to distribute into your envelopes.
  4. Fill envelopes and spend (only) that money. Based on the goals and parameters you set for yourself, fill each envelope with the appropriate amount of cash. Once you spend the money in that envelope and it’s empty, you are done spending in that category. For example, if you put $80 in your entertainment envelope and the baseball tickets you want to purchase are $65, you’ll only have $15 left to spend in that category until your next paycheck.
  5. Assess your progress at the end of the month. Adjust your cash allotment in each envelope to find the perfect spending balance that works for you.

Example envelope budget:

*This is an example and is not indicative of what one’s financial situation should look like in order to benefit from using the envelope budget method. The character in this budget is fictitious and not derived from actual customer data.

Meet Crafty Crissy. It's easy for her to whip out the credit card and worry about paying later, but that has put her in debt with the credit card company. Crissy did some research and decided the envelope method would be the best budget for her because she can see where her money goes, which will help keep her spending in check.

Crissy wants to prioritize paying off credit card debt to improve her credit score and make sure she has enough money for her hobbies (painting, sewing and scrapbooking). Her current vehicle is getting old, so she wants to get a new one in the next few months. Even though she’s still deciding if she wants to lease or buy a new vehicle, she used an affordability calculator to factor a car payment into her budget so she can save for the down payment.

Since Crissy wants to stay organized and take care of business, she automates some of her fixed expenses, like her phone bill and car payment, and directly deposits some of her paycheck into different savings accounts. This is how she divided her expenses:

Pretax Withdrawals:

 

  • 401(k): $416
 
  • Health Insurance: $225

 

Automated Expenses and Savings:

Other Expenses (will go in envelopes):

  • Rent: $1,050
  • Groceries: $400
  • Utilities: $110
  • Gas: $140
  • Credit Card Debt: $150
  • Vehicle Maintenance: $25
  • Phone Bill: $120
  • Me Stuff (haircut, clothes, makeup): $120
  • New Car Savings: $350
  • Fun Money (eating out and entertainment): $130
  • Long-Term Savings: $100
  • Hobbies/Crafts: $75
  • Emergency Fund: $50
 
  • Vacation Savings: $150
 
  • Auto Insurance: $140
 
  • Subscriptions: $15

 

Once she categorized her expenses and set spending goals, she makes the envelopes to put the cash in. These are the envelopes she creates:

Fun Money

Me Stuff

Vehicle
Maintenance

Groceries

Gas

Hobbies/Crafts

Crissy gets paid $3,125 a month after taxes and figures out the best way to split her money. After receiving the first paycheck, she subtracts her automated payments and designated savings, withdraws the remaining money from the ATM and puts the cash in the envelopes accordingly.

Paycheck No. 1: $1,563

Automated Payments: rent + half of emergency savings + half of long-term savings = $1,125

Envelope money: $438 distributed

Groceries:
$200

Gas:
$70

Hobbies/Crafts:
$35

Fun Money:
$60

Me Stuff:
$48

Vehicle
Maintenence:
$25

During the first two weeks, Crissy is only able to spend the money available to her in the designated envelopes. When she gets her second paycheck, she repeats the process from the beginning of the month.

Paycheck No. 2: $1,562

Automated Payments: utilities + credit card debt + phone bill + new car savings + auto insurance + subscriptions + vacation savings + half of emergency savings + half of long-term savings = $1,110

Envelope money: $452 distributed

Groceries:
$200

Gas:
$70

Hobbies/Crafts:
$40

Fun Money:
$70

Me Stuff:
$72

If there is any money left in the envelopes at the end of the month, Crissy deposits it in her long-term savings account. If she notices certain envelopes run out of money quickly and others have a lot remaining at the end of each month, she will adjust her spending expectations and reallocate money as she sees fit.

The envelope budget is just one solution to help meet your financial goals. There are other methods out there that can help you prioritize your spending, set aside savings and keep track of expenses. If this budget doesn’t seem to foot the bill, read about other budgets that might be right for you, like the 60-40 budget rule, line-item budgeting, the zero-based budget and the pay yourself first method.

Nicole Mayer
By Nicole Mayer, GM Financial

Nicole Mayer is a whisk-taker with a fondness for desserts. From baking to organizing, she’s motivated by trying new things and sharing her knowledge. When she’s not in the kitchen rocking out to ‘80s music, you’ll find her serving up aces on the tennis court.

 

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