What does the envelope system in personal finance involve?

The envelope system in personal finance is a cash management method that involves dividing cash into different envelopes designated for specific spending categories. This approach helps individuals manage their budgeting by physically allocating cash for necessary expenses such as groceries, entertainment, and utilities. By doing so, it allows for greater control over spending and encourages users to adhere to their budget since once the cash in an envelope is gone, no additional spending can occur in that category without either adjusting the budget or reallocating funds from another envelope.

This method is particularly effective for those who find it challenging to stick to a budget when using credit or debit cards, as it creates a tangible way to keep track of spending. The visual aspect of seeing the envelopes can also reinforce discipline and awareness regarding how much money is available for various expenditures.