The cash envelope system is one of the most effective strategies you can implement to organize your finances. Although many people will argue that using cash envelopes is not convenient or practical, it is the most effective way to stick to your budget and save money.
You will significantly benefit from the cash envelope system if you are consistently overspending, over-drafting your checking account, or are trying to get out of credit card debt.
How Does The Cash Envelope System Work
The cash envelope system is super easy to use. It consists of setting a spending limit on specific budget categories, pulling cash from your bank account, and stuffing it in a labeled envelope for that category. When the money in that envelope runs out, you can’t purchase anything from that category until you are due to stuff your envelope again.
Some people stuff their envelopes once a month, others every week or every two weeks. It will all depend on how much of a spending cushion you already have in your checking account.
The cash envelope system is very useful in helping you create awareness on how you spend your money. However, to be a successful cash envelope spender, I recommend you to follow these steps.
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Follow These Steps To Implement The Cash Envelope System
#1 Create A Unique Budget Every Month
To know how much money you should assign to your cash envelopes, you need to have an accurate estimation of your expenses. Creating a budget and tracking your expenses every month will give you precise information on your spending habits.
If you are not budgeting, you can still use the cash envelope system. However, you will get much better results making cash envelopes part of your money management plan.
If you need help starting a budget, make sure to access my free budgeting training.
Here are other resources that can help you budget:
- How To Budget Your Money
- What Percentage Of Your Income Should Go To What
- How To Do A Monthly Expenses Snapshot
- How Much To Spend On Groceries
- Budgeting If You Get Laid Off
#2 Choose What Budget Categories To Use With The Cash Envelope System
As I mentioned earlier, some people think that the cash envelope system is not practical. But in my opinion, they think that way because they don’t know how it works.
Of course, it would not be practical to put money every month in an envelope just to turn around and drive to the bank and make the mortgage payment. Your mortgage or rent payment is a fixed expense, as well as your utilities and basic living necessities.
The key to using the cash envelopes successfully is selecting the budgeting categories to use it for. So, these are some of the fixed expenses you should be budgeting for.
Fixed Expenses in your budget:
- Rent or mortgage
- Utilities such as the electric, gas, and water bills
- Internet, cable, and cellphone bills
- Health insurance (if you are not paying it with pre-tax money)
- Life insurance
- Investments (if you are not contributing with pre-tax money)
I recommend that you schedule your fixed expenses through direct drafts from your checking account. Again, make sure to build up a spending cushion to avoid over-drafting.
Your cash envelopes should be primarily for the variable spending categories of your budget. Examples of variable expenses include the following.
Variable expenses in your budget:
- Grocery shopping
- Eating out
- Fun
- Personal expenses
- Gifts
- Gas
- Clothing
- Home office supplies
- Pet care
- Health care
- Haircuts and manicures
- Miscellaneous
I know that most expenses range a little bit from month to month, except for things like rent, mortgage, or insurance payments that may be set every month.
Your fixed expenses are mainly those we have little or no control over. For instance, we can save money on electricity by turning off lights we are not using. But, ultimately, we can’t control what the bill will look like.
In contrast, the variable spending categories are things that we have more power to control. For instance, we can choose not to eat out and instead make meals at home to save money. We can also decide to start a meal plan to reduce our grocery bill and avoid wasting food.
Now that you understand the difference between fixed and variable expenses choose which ones from the variable category you will manage with the cash envelope system.
#3 Withdrawl Cash For Your Envelopes
With your budget at hand, calculate the money you need to have in each envelope. If you get paid once per month, you will want to draft the amount for each category monthly. Plan your cash drafts accordingly if you get paid weekly, bi-weekly, or twice per month.
Do the math and go to the bank on your payday to pull enough cash to stuff your envelopes for that period. Only use the money in each envelope to cover expenses for that specific category. Use sticky notes to track your expenses every time you use your envelopes.
#4 Label Your Envelopes
You can practice the cash envelope system using simple white envelopes and writing the spending category on them. Some of the categories that I use my envelopes for include:
- Groceries
- Restaurants
- Entertainment/Fun
- Personal expenses
- Wrestling fees
- Business expenses
- Gas
If you want to upgrade for a couple of bucks, you can look into more stylish cash envelopes like those we sell in our shop. And if you’re going to really take your cash stuffing to the next level, consider buying a cash envelope wallet. I got this cash envelope wallet from Amazon and I love it! It allows me to keep my cash, receipts, coins, and cards organized in one spot.
#5 Stuff Your Cash Envelopes
Split up the money you withdrew and add the budgeted amount in each envelope. For categories such as groceries, I recommend that you stuff one envelope per week of the month, just to avoid overspending.
For instance, if you budget $800 for groceries, instead of carrying $800 in one envelope labeled “groceries,” split that amount into four envelopes labeled “Groceries Week #1”, “Groceries Week #2”, and so on.
Make sure to check a calendar when working on your budget and before the month begins. There are a couple of months of the year with an extra week that you need to consider. If you get paid weekly, you will have extra income, but also some additional expenses.
To learn more about how to estimate your income and expenses, check out this post I wrote about creating a monthly expenses snapshot.
#6 Use The Money For That Envelope Category Only
The cash envelope system works wonders, but it requires you to be disciplined not to use the money for other expenses. If you are going to the grocery store, do not be tempted to overspend knowing you are carrying more cash in other envelopes.
The purpose of the envelope system is to help you budget and avoid overspending. Cheating and pulling money out of other envelopes would only defeat the purpose of the cash envelopes.
To avoid cheating or overspending, check your envelope balance before heading to the store, gas station, or restaurant. Making sure that you have enough money in advance will help you stay on track.
As you use the cash envelopes, you will become more aware of your spending behavior. Awareness is the key to improve your finances and really every aspect of your life.
#7 Stop Spending When The Money Runs Out
By now, you are probably thinking, ok, I get how it works… But what if I run out of money? And this will likely happen. Ideally, you want to stop spending on that category when the cash envelope is empty. That is the ultimate goal.
However, in the beginning, give yourself some grace as it will take a couple of months of budgeting and stuffing envelopes to get to a point where you get your amounts right.
In the case of grocery shopping, I recommend that you first pay for your necessities and check the balance with the clerk before paying for that box of cookies, the set of markers, or the seasonal nail polish shade that slipped in your shopping cart.
It is saying no to those small expenses that will help you develop the discipline to make better money choices to hit your financial goals faster.
If you run out of money, you can decide to eliminate expenses from other cash envelope categories to supplement your spending in different categories. This should be the exception and not the norm, as it would undermine the purpose of getting on the cash envelope system.
Personally, I would only do this in the “groceries” category. Expenses like eating out, entertainment, fun, haircuts, manicures, etc., are not necessities and should be eliminated at least temporarily so that you can use that cash to beef up your spending cushion, emergency savings account, and pay off your debt faster.
#8 Write Down Every Expense On Your Envelope And Save Your Receipts
Every time you make a purchase, write down the amount you spent on your envelope and save your receipt inside the envelope. Keeping track of where the money is going will help you stay more organized.
Then, write down your expenses on your budget planner book. It will be effortless to do as you have already written down this info on the envelope and saved your purchase receipts.
If you are not budgeting on paper, I would recommend you to give it a try. For a decade, I tracked all our spending on an Excel spreadsheet. It worked great. I even color-coded our expenses by categories. However, over the years, I felt disconnected from my finances.
Electronic tracking was easy and fast. It required minimal effort, and that, I realized, was a problem. You see, the more time you spend doing an activity, the better you get at it. I realized that I would be making use of my money if I tracked it on paper.
Budgeting on paper creates more awareness because it requires engaging several senses. Writing things down, counting money, making a spending plan gives you more control over your money than inputting numbers into a spreadsheet.
Now, I mainly use my budget planner. I still use a spreadsheet when I need to figure different spending scenarios. However, I do my budgeting, spending tracking, and cost-of-living calculation every month manually. And, I feel more in control of my finances than I ever did before.
#9 Eliminate The Use Of Credit Or Debit Cards
I recommend that if you are going to get on board with the cash envelope system, you eliminate the use of credit or debit cards.
The purpose of the cash envelopes is to help you stick to a budget and reduce overspending. Credit cards we all know allow you to overspend. And although you could overdraft a debit card, paying with a piece of plastic undermines the awareness you get from paying with cash.
Also, using credit cards will make it very difficult for you to budget, as the purchases you make now have to be paid next month. Unless you have the discipline to log into your account every time you make a purchase to pay it off, you should leave the credit cards at home.
Believe me, balancing credit card purchases, cash purchases, and debt is one of the issues my financial coaching clients struggle with the most. To learn more about this topic, you can check out this article:
If you make a purchase for your cash envelope categories using a credit card or a debit card, you should pull the money from that envelope anyway to deposit it in your bank. If you don’t have the discipline to do this, you will mess up your budget and risk over-drafting your checking account or getting into credit card debt.
Conclusion: How To Use The Cash Envelope System To Budget
If you are used to using your credit or debit card for most purchases, embracing the cash envelope system will be almost like a culture shock. I know it would be too much to ask of you to change your habits immediately. However, if you want to better manage your money and keep your finances organized, you should give it a try.
You can get started with the cash envelopes by choosing to implement them in three spending categories. Remember, preparation is the key to be successful. So, follow these steps to implement the cash envelope system in your everyday life:
- Create A Unique Budget Every Month
- Choose What Budget Categories To Use With The Cash Envelope System
- Withdrawl Cash For Your Envelopes
- Label Your Envelopes
- Stuff Your Cash Envelopes
- Use The Money For That Envelope Category Only
- Stop Spending When The Money Runs Out
- Write Down Every Expense On Your Envelope And Save Your Receipts
- Eliminate The Use Of Credit Or Debit Cards
So, are you really going to give the cash envelope system a try? I would love to hear your thoughts! Please, comment below and tell me three budget categories you could transition to the cash envelope system.
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