To use the envelope system for budgeting, allocate money to separate envelopes for all flexible spending categories, such as groceries, entertainment and clothing. Don't use the envelopes for fixed monthly expenses like rent and utilities. The goal is to limit spending in areas where it's easy to exceed your budget.
At the beginning of each month, consider your upcoming expenses, and determine an appropriate amount to spend on each category. Write each category name on a separate envelope, and add cash at the beginning of the month or on each pay day. When you go to the grocery store, take the applicable envelope and purchase groceries using only the money in the envelope; don't borrow money from other envelope categories. When an envelope is empty, stop spending money on that category. If you have money left at the end of the month, roll it into next month's envelope or allocate it to savings or debt payments.
The basic envelope system uses cash for all flexible spending, but some people use a debit card for purchases then subtract the transactions from the amount allocated to each envelope. The debit-card method achieves the same purpose but eliminates the possibility of loss or theft when carrying large amounts of cash.