What it is, is the person doing the budget each month is working on a cash only budget (no credit cards), and is not permitted to use the debit card from the bank. This is done purely to learn budgeting and is an exercise that may or may not be followed long term. At the beginning of each period, which is usually a pay period (when pay cheques are given), all the income is taken and put into different envelopes. Each envelope is labeled according to what the money is for, such as rent, groceries, cable, transportation, etc. Due dates of bills are also written on the envelopes.

The person managing the budget must be aware of how much is in each envelope and track the contents properly. Each envelope is then used only for what it is labeled to be used for. Of course, using these in conjunction with a calendar is a good idea, that way bills aren’t missed. And most bills are then paid either at the counter of the billing company or in person at the bank. It’s kind of a basic system for those who have never managed to understand budgeting or used for people who need a system that has restraint built right into it.

Keep in mind that this system does not allow you to use any credit cards whatsoever! You are restricted to the cash in each envelope. I kind of thing this is a good idea for those learning, and I will definitely use it for my kids when they are old enough to understand. What do you think?