Envelope Budget System Explained for Canadians

If you’re looking for an easy way to think about where your money goes, the envelope budgeting system might be for you. 

The concept of the envelope, or zero-based budgeting, is simple.

There are also many apps out there to help you on your journey. 

Read on to find out how to get started.

What is the Envelope Budgeting Method?

The premise of the envelope budgeting method is to categorize every dollar, so you don’t feel like you have money “just sitting there” in your bank account.

If you decide what to do with your income in advance, you’ll be less likely to spend on impulse purchases.

To create your envelope budget, divide your monthly expenses into different categories, or “envelopes.” 

You get to decide what those envelopes look like.

You might have three categories for “needs,” “wants,” and “savings.”

Or you might have dozens for “eating out,” “student loan payments,” and every other specific item you spend on.

You can make the budget with cash and actual envelopes if you want — but most of us like to use cards for some purchases.

If that’s the case, you can use an app like YNAB (You Need A Budget), one of the most popular envelope budgeting apps.

You can also create your own version using a Google Sheet or Excel sheet.

How to Implement the Envelope Budgeting System

Getting your envelope system set up is simple

1. Calculate Your Monthly Income and Expenses

If you already have a budget, great.

Start there, and look at how much you spent, and on what, each month.

It’s good to look at the past few months so you can account for any outlier expenses, like one-off vacations.

If you don’t have a budget, you can still easily calculate your expenses.

Use an online budget calculator to help you here.

You can also look through your credit or debit card statements to see exactly what you bought.

Key Insight

A good starting point for a budget is the 50/30/20 rule:

  • 50% of your income should go toward needs
  • 30% goes toward wants
  • 20% goes toward savings

2. Decide on Your Categories

Now you’ll need to figure out what kind of envelopes you want to create. 

Think of specific categories like rent and student loan payments.

Will those go into separate categories for “housing” and “debt,” or will they be bundled into “needs”? 

Also, consider broad categories, like food.

Will you divide it between groceries and eating out? What about non-necessities like alcohol or cookies?

The beauty of the envelope method is its simplicity.

However, simplicity can be deceptive — it does require some thinking at the beginning to get started.

3. Keep Track of Your Spending

Now it’s time to put it into practice! Get your envelopes and markers ready — or download an app, or create a spreadsheet — and get cracking.

Once you have everything set up, you’re good to go! Just stick to your budget as best you can, and be ready to tweak it next month if your categories don’t match up with reality.

Guy holding envelope that is part of his envelope budget system

Is Envelope Budgeting Right For Me?

The envelope budget method has a track record of proven success.

But it isn’t for everyone. 

Advantages

  • It’s adaptable. You can have as few as two envelopes — “needs” and “wants” — or you could have hundreds. It’s all up to how you best want to manage your money.
  • It’s simple. Often, the best ideas make you go, “Why didn’t I think of that?” The envelope method is a good example. Giving your dollars jobs 

Disadvantages

  • It’s not for everyone. If you’re a freelancer, or you otherwise don’t make a consistent amount of money each month, it can be hard to figure out how to divide your income into envelopes.
  • It requires forethought. If you have a good handle on what you spend money on each month, great. But if you’re starting from scratch, it can be a slog to go through your expenses and decide on your envelopes. The good thing is that setting it up is the hardest part. And you can always adjust the budget next month.

Frequently Asked Questions

  • Does the envelope method work?
  • What is the purpose of the envelope system?

Jack Hauen is a freelance writer and journalist. He has talked to full-time dungeon masters about how they made D&D their full time job, and explained the "crushing sadness" of the downtown Toronto renting experience. His reporting has appeared in Canada's top publications, including the Globe and Mail, Toronto Star and National Post.

If you meet him at a party he might try to explain the ins and outs of credit card churning but will not be offended if you slowly back away. When he's not lurking r/PersonalFinanceCanada, he can often be found in the Algonquin backcountry, already gassed after the first portage of the day.