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What is a Cash Envelope System?

March 21, 2023

Do you have a hard time staying on budget and not overspending? Then the cash envelope system might be exactly what you need to finally succeed at budgeting.

The envelope budget can make budgeting an easy and natural process, rather than the complicated process of using charts, spreadsheets, and calculators. 

The cash envelope method has been around for a while now, but many people still don't know about this easy way to budget. Even Dave Ramsey recommends the envelope system for anyone who has trouble controlling their finances.

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What is a Cash Envelope System?

A cash envelope system is when you use cash and envelopes to organize your budget. So instead of creating charts and spreadsheets, you literally create your budget categories with a designated envelope for each budget category and then place the money allotted to each category into each envelope. 

With a cash envelope system, you stop using checks, credit cards, and debit cards and instead use cash for all your spending. Then you divide all your cash into envelopes that are marked for each budget category. 

There are many ways you can create your own envelope system for budgeting, but the most common envelope budget is when you put cash in envelopes that are labeled for each section of your budget. 

But you can also put fake cash into envelopes and take "money" out of your envelopes as you continue to use cards instead of taking out cash. This way you can still benefit from the visual ease of the envelope system while still being able to use your debit cards. 

You can also find notebooks and wallets that are designed for a cash envelope system. These cash envelope system wallets have card slots where you can insert tabs that tell you what slot is for which cash fund. That way, you don't have to use paper envelopes. 

You can also use an app to digitally recreate the envelope budget system or you can use a cash envelope system just for the parts of your budget where you tend to overspend. 

The Good Budget app is a great household budget app that incorporates the idea of a cash envelope system but digitally.

For example, maybe you just have a tough time each month spending too much on eating out, but all other aspects of your budget are easy to control. 

Just carry around a cash envelope of the set amount you want to spend on eating out each month and you'll never be able to overspend on fast food again!  

Why the Cash Envelope System Works

If you have trouble going over budget then you might benefit from a more straightforward and literal budget. One of the biggest things that makes budgeting hard is that you have to have complete accountability, monetary discipline, and keep track of your own spending. 

With an envelope budget, you get rid of a lot of the work that comes with a traditional budget. Now you don't have to calculate how much you spent and subtract it from your income to know where you stand in your budget. 

  • Visual
  • Tangible 
  • Literal 
  • Makes self-discipline easier

The biggest perk to envelope budgeting is that it makes self-discipline when it comes to your spending habits a lot easier. For example, if you want to spend money on some clothes, but you don’t have any money left to spend on your clothing budget, you'd have to steal from another envelope. But then you won't have that money for gas or rent. 

Do you see now how an envelope system makes your budget more real and tangible? Instead of being an abstract idea, you calculate with numbers on a spreadsheet, your budget comes alive in your hands with the cash you actually spend. 

Hundred bills inside of an envelope

How to Use a Cash Envelope System

Now that you have a better idea about what the cash envelope method is and why it's great, let's get down to the nitty-gritty of actually implementing this budget into real life. 

Step 1: Decide Budget Categories

The first thing you want to do when creating any budget is to decide the categories you want in your budget. It can help to take a look at your past transaction history to see what kinds of things you spend money on. 

You might need a category for gas or for bus fare or maybe you need a budget for eating lunch at the school or work cafeteria. Everyone's categories are going to look different but the sections of your budget should include both varied and fixed expenses. 

Examples of Expenses:

  • Bills:
  • Rent 
  • Utilities 
  • Insurance
  • Cell phone 
  • Car payments
  • Debt payments 
  • Subscriptions
  • Groceries
  • Eating out
  • Household supplies
  • Gas
  • Health and medicine
  • Hair stuff 
  • Makeup
  • Hygiene supplies
  • Car maintenance
  • Entertainment
  • Gifts
  • Clothing

Step 2: Decide How Much to Spend on Each Category

Once you have figured out the sections of your budget you can start deciding how much you want to spend on each category. This is the part where you'll want to calculate your budget.

Write down how much you make each month, then divide that monthly income into all your budget categories. Once you know how much you can spend on each category in one month, you can then figure out how much you'll want to put in each envelope after each paycheck. 

For example, if you want to spend $300 on groceries each month and you get paid roughly twice a month, then you can plan to put $150 in cash into your grocery envelope on each payday. Just do this for all your budget categories and you're good to go! 

Step 3: Use the Envelopes!

With the hard part all figured out, now you can get your cool envelope system going! You can just use regular envelopes or you can buy a cash envelope wallet or neat-looking envelopes. There are many different cool ways you can set up your envelope system. 

What to Do with Extra Cash at the End of the Month 

At the end of each month, you might have extra cash kicking around in your envelopes. First of all, if you end the month with a surplus of cash you should congratulate yourself! You successfully went under budget. 

There are a couple of things you can do with your extra cash. You can splurge it, you can save it, or you can keep it in the envelope so you have even more to use next month. This would create a kind of small savings account that accumulates in each envelope. 

You could also start an emergency spending envelope for that extra cash. That way when you're at the grocery store and the total comes to $150, but you only have $140 in your grocery envelope, you can pull from the emergency extra spending envelope. 

But if you have debts to pay off, it's best to use this extra money to make bigger debt payments so you can pay them off even faster.

If you don't have debt payments to take care of then you can put the extra money toward an emergency fund.

A hundred dollar bill with extra income paper wrapped around it

What About Online Purchases?

If you still want to make purchases online, then try making your bank account its own cash envelope. 

Make a physical copy of your online shopping envelope with fake dollar tickets that you can look at and take out as you use them to make online purchases. Then you can leave the amount you want to allow for online spending in your checking account.

This goes for whether you want money there for online shopping or for online bills. Just make an "online spending" envelope with fake money to represent how much in your account you want to be divided between online bills. 

You can even use fake money in all your envelopes to physically represent your checking account and how it's being used. That way you could use the cash envelope system without taking out any cash and still using your debit and credit cards.