What is the “envelope system”?

The envelope system is cash-based spending, based on the principle that you pay more attention to costs when you are handing over cold, hard cash than when you’re using a credit or debit card – or even writing a check. You still begin with a budget, but cash is set aside for discretionary items in envelopes labeled for each budgeted expense. Common categories are eating out, travel, grooming, gifts, and clothing. These purchases are paid from the envelope with money saved for that expense. No money, no purchase, simple as that. What almost always happens is that the pleasure one gets from watching an envelope grow fatter with cash is more enjoyable than whatever it is budgeted for. Arguments that you are losing points on credit card purchases are offset by studies showing people are willing to pay more when using a credit card. Iow, if you use credit cards to get freebies, they’re probably not free.

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