How to Use Cash Envelopes as a Budgeting System

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    When it comes to budgeting, there are a million options out there. Today, let's talk about a trendy option that many people use: cash envelopes.

    What Are Cash Envelopes?

    Cash envelopes are pretty much what they sound like: envelopes that you put cash in. The tricky part is that you can only spend what you have allotted in each envelope. I know, that's easier said than done!

    The cash envelope system isn't a new budgeting concept. In fact, people have been using it as a way of budgeting since the 1880s. However, finance guru and radio talk show host Dave Ramsey made it famous in 1998 in his book The Financial Peace Planner: A Step-by-Step Guide to Restoring Your Family's Financial Health.

    The way the cash envelope system works is pretty simple. You set a monthly budget, create an envelope for each budget category, and fill it with cash. (I'll talk more about budgeting categories in a bit.)

    Then, you are only allowed to spend the money you have in each separate envelope. Once it's gone, it's gone, and you're out until the next month.

    Ramsey believes that when people use a credit or debit card to buy things, they tend to spend more than they would if they were paying with cash. So, using cash is a way to get people to spend less and stick to their monthly budget.

    Paying for things with cash triggers pain sensors in your brain, which you feel when the money leaves your hands. Pretty interesting, huh?

    Who the Envelope System is Designed for

    Using a cash envelope system is great for anyone who is looking to:

    Advantages To Using Cash Envelopes

    Like any budgeting technique, there are lots of advantages to using cash envelopes, including:

    • Using cash makes it harder to overspend.
    • Using cash envelopes can help you get out of debt.
    • Sticking to physical money stops you from racking up additional credit card debt.
    • Using this system can help break your online spending habits.

    How do I start envelopes for cash? 

    The steps to using cash envelopes to budget are relatively easy to follow and start using as your budgeting system:

    Step 1: Determine your budget categories & envelopes.

    Like some of the budgeting software platforms I've written about (Mint or YNAB), the cash envelope system also requires you to set up different budgeting categories.

    Keep in mind that not everyone will use the same envelopes. For example, you could have a car payment envelope, while someone else doesn't. The easiest way to get started is to focus on the categories where you need to curb your overspending.

    Here are some popular cash envelope budget categories to get you started:

    • Housing
    • Utility bills, including electricity, gas, water, sewer, trash, and recycling
    • Groceries, restaurants, and take out
    • Transportation, including gas, oil changes, car maintenance, repairs, tags, and license renewal
    • Medical expenses, including medicine, copays, dental, and vision
    • Toiletries (Hair Care/Makeup/Skin Care/Grooming, etc.)
    • Entertainment (movies, theatre, concerts, etc.)
    • Gifts for birthdays and holidays
    • Kids' activities, school supplies, and other needs
    • Clothes, shoes, and accessories
    • Self-care (massages, facials, manicures, pedicures, gym membership fees, meditation app subscriptions, etc.)
    • Hobbies and fun money
    • Emergency money
    • Miscellaneous expenses

    To learn more about budgeting categories, including the ones I think are most important when setting up a monthly budget, check out my post: The Top Budget Categories You Actually Need.

    Step 2. Decide how much cash you should put in your cash envelopes.

    Now, here's the hard part. You have to figure out how much you want to spend for each budgeting category and stick to that amount.

    I wouldn't use back of the envelope calculations for this (see what I did there? 😉 ). You'll need two types of information to determine how much money to put in each cash envelope:

    • How much money you earned last month
    • How much money you spent last month

    Take a look at last month's expenses and start there. If you bought $800 worth of groceries, and want to trim it down, try cutting it by 10% and put $720 in the grocery cash envelope.

    It's easier to cut spending in small chunks than try significant sweeping changes. Minor updates will stick better and be more likely to be adapted easier.

    Step 3: Fill Each Envelope With Cash. 

    So, you've created budget envelopes for all categories and determined how much you want to spend each month. The next step is to head over to your bank, get the cash you need, and fill those envelopes. If you budgeted $100 a month for take-out, fill that envelope with, you guessed it, $100.

    Step 4: Find An Accountability Partner.

    It can be tough to stick to a budget, so having an accountability partner who will hold you to your budget can help keep you in check. Your accountability partner can be your partner, a friend, a family member, etc. Just pick someone who won't let you slide or fall off the "budgeting wagon."

    Step 5: Use The Cash In Each Specific Envelope When You Make A Purchase For That Category.

    It's up to you if you decide to carry all your envelopes with you or not. At this point, it's essential to have you look at how much you have left for that category before you make the purchase. Cash envelopes are a great way to make you slow down and think before doing any compulsive spending.

    Step 6: Put Any Change Back Into That Envelope And Calculate The Balance. 

    Once you get home from your shopping trip, this is also an excellent time to note what you have left in that envelope and write it down. Writing down your spending will help you plan future shopping trips for that budget category.

    Step 7: Keep an eye on your spending for each cash envelope.

    Here's the even more challenging part. You cannot spend more money than you have. So, if you're at the grocery store, and you only have $100 left in your grocery envelope, and your total is $120, you have to put some items back. It's not fun, but at least you won't go over budget, and it forces you to take a closer look at your spending.

    However, your other option is to grab extra money from another envelope. While it's not ideal, at least you'll find ways to creatively spend less in different categories for the items you really need.

    Where to Buy Money Envelopes

    You can use your own envelopes (even the return-free envelopes that come with bills in the mail!), buy fancy color-coded envelopes, or even get a unique envelope system product, like a cash envelope wallet or binder.

    There are tons of excellent cash envelope products at Walmart, Amazon, and Etsy. Below is an affordable option:

    Cash Envelope Products on Etsy

    Rae Dunn Inspired Laminated Cash Envelopes

    rae dunn inspired cash envelopes

    Image by CreationsbyChantinge

    Sold in increments of 7, these laminated cash envelopes can be custom labeled to fit your budget. These envelopes come pre-punched to fit in an A6 binder, and come in just about any color imaginable!
    Learn more >

    Cash Envelope System Starter Set with A6 Binder

    cash envelope starter set

    Image by TheAverageBudget

    This cash envelope starter set includes an A6 binder in a variety of colors and six personalized clear zipper pouches with vinyl category label. You can even opt to add a vinyl sticker to the binder itself!
    Learn more >

    Set of 10 Indigo/Pink Cash Envelopes

    indigo and pink cash envelopes

    Image by Uniquetouchkreations

    These beautiful laminated cash envelopes are 7x3 and are thicker than the average envelope. Sold in a set of 10, these handmade cash envelopes are perfect for starting your budget.
    Learn more >

    Personalized Leather Clutch

    leather clutch

    Image by Babak1995

    These gorgeous leather wallets come in a variety of fourteen colors. Perfect for holding your cash envelopes, this wallet has an elegant lock and vintage fire engraving to personalize it.
    Learn more >

    10 Laminated Cash Envelopes

    laminated cash envelopes

    Image by KellyFasslerDesigns

    These handmade laminated card stock envelopes are a cute and fun way to budget. Comes with or without labels, and with or without holes punched, and are the perfect size for a binder.
    Learn more >

    Personalized A6 Cash Envelope System with 6 Envelopes

    personalized binder

    Image by TheBeachyCraftShoppe

    Chose from eight colors and 6 to 10 envelopes. Personalize the front of the binder, and then add a second personalization, like an inspirational quote, on the inside cover as well.
    Learn more >

    Cash Envelope Products on Amazon

    12 Piece Cash Envelope System for Budgeting

    This budgeting set includes 12 cash envelopes, 12 budget sheets printed on both sides so you can organize your expenses, and 48 rainbow, black, and white to categorize.
    Learn more >

    12 Waterproof Budget Envelopes

    Water and tear resistant, these envelopes come with 12 budget sheets to help you manage your money. Cute designs and perfectly sized to slip into a purse or wallet!
    Learn more >

    12 Tabbed & Laminated Cash Envelope System

    This one's unique in that it comes with a tabbed organizer system, making it a great way to keep all your cash envelopes together in one place. Also comes with cute envelopes, budget tracker sheets, and stickers.
    Learn more >

    What to Do with Leftover Money at the End of the Month

    If you find yourself with extra cash in any of your envelopes at the end of the month, you rock! Seriously, it's not easy, so good for you.

    You can opt to roll this money over to the next month, so you have a little extra. You can treat yourself to a nice dinner or put the money in your savings account or sinking fund. Or, you can put it towards paying off one of your credit card bills. The options are endless!

    Potential Downsides to using a Cash Envelope System

    1. Online Purchases

    Like I said earlier, sometimes you have to buy things online. If you need to make an online purchase with your credit card, take the money you spend out of the designated envelope put it back into your checking account. Then, make a credit card payment as soon as possible so you don't accumulate any interest on that purchase.

    Another easy way to handle online purchases is to create an envelope for online purchases. This envelope will be empty at the beginning of the month. But, anytime you buy something from one of the other budget categories online, you will transfer that money to your online purchasing envelope. Then, at the end of the month, all of that money is back into your checking or bank account.

    A third option is to use cash to buy a gift card to make online purchases. This is a good idea because you're still following cash spending and budgeting envelopes, but you're capped at how much is on the gift card. This way, you'll be able to suppress any impulse buys and stop yourself from spending more money than you have.

    2. Purchasing Several Items That Fall Under Multiple Budgeting Categories

    This can be a little tricky. Let's say you are making a Target run because you need several items. Many Targets have groceries, so you decide to pick up the eggs and bread you need for breakfast tomorrow. But, you also need shampoo and ink for your printer. The easiest thing to do when you are in a situation like this is to split the items into separate purchases. That way, you can use each designated envelope. You also might want to consider using the self-checkout to complete your transactions.

    3. Shuffling Cash Around 

    One thing you want to steer clear of is borrowing from your other cash envelopes. It's so easy to say, "Well, I'm out of my grocery money, but I really need a bottle of wine, so I'll just borrow $20 from my self-care envelope." But, this is a slippery slope that can lead to overspending.

    Plus, the whole point of the cash envelope system is to help you get your spending in check. It defeats the purpose if you are constantly borrowing from your grocery budget amount to support your Amazon addiction.

    Some costs are always going to be variable expenses. For example, my gas bill is different every month. Over the last year, I looked at my account and figured out the average monthly bill. I treat it like a fixed expense and always set aside that amount every month. I set it aside for a future statement or move it if I have extra.

    The Verdict: Do Cash Envelopes Work?

    Yes, they do! gathered some great info from several different studies pertained to paying for things with cash versus credit or debit cards. Here are some of the key findings they pointed out:

    • Avni Shah, a professor at the University of Toronto Scarborough and Rotman School of Management, found that paying with cash triggers different pain sensors in the brain. Shah also concluded that using cash encourages people to shop around for better prices, while breaking out the debit or credit card often makes people spend more on things.
    • In 2016, Shah and researchers from Duke University and the University of North Carolina conducted a study that concluded that credit/debit cards make consumers feel less connected to purchases, so they end up spending more.
    • In 2001, two Massachusetts Institute of Technology professors conducted a study where they randomly selected participants and offered them the chance to purchase tickets to a critical sold-out basketball game. Some participants were told to pay with cash, and some were told to pay with their credit cards. The findings showed that those told to pay with money were less willing to part with their cash than those who had their credit cards on hand. In fact, credit card users spent twice as much as cash spenders.

    So, yes, the cash envelope system works; it takes a bit of time to set up and get used to using cash.

    The cash envelope system is a great tool for those who need to curb their spending and want to work on sticking to a particular budgeting method. If you're going to start saving or paying down debt, the cash envelope method will help you accomplish those goals.

    If you have tried the cash envelope system, I'd love to hear how it worked out - comment below!

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    A forty-ish web designer/developer by day, a budget & financial fanatic by night. I’m a mom, wife, avid reader, and DIY enthusiast who’s tracking our journey to debt freedom. Read More

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