What You Need to Know About the Cash Envelope System
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A lot more people are becoming familiar with the cash envelope system nowadays, and for good reason. The cash envelope system can be a great tool to help keep your budget on track.
With over half of Americans living paycheck to paycheck, it is clear that SOMETHING needs to be done to help people get ahead.
This is where the cash envelope system can be a lifesaver. It is especially great if you are one of those people who feels like you CANNOT. STAY. ON. BUDGET. No matter what.
When Joel and I had to get our budget back on track after I started my first job, we used the cash envelope system for a while. We personally chose not to continue with it indefinitely (for reasons I’ll go over later). But, it helped jump-start our budget and get us back on track when we used it for a few months.
The cash envelope system was definitely a game-changer for us and it might just be for you. Keep reading for everything you need to know about how and why to use cash envelopes, and when you might be better off switching to something else.
This post may contain affiliate links. Please see my full disclosure policy for details.
What is the Cash Envelope System?
So if you are unfamiliar with what the cash envelope system even is, here is a quick rundown.
Basically, you take the budget you’ve already made and figure out how much you have allotted to each category for your month of spending.
If you don’t already have a budget, you’ll definitely want to enroll in my FREE 5-Day Budget Email Course. This course walks you through everything you need to do to start your first budget. (I even give you tools like a budget tracker printable and an excel spreadsheet to keep track of your spending.)
If you get paid biweekly, you can also opt for budgeting by paycheck to help you keep an even tighter eye on your finances. If you are one of the people who are included in the paycheck to paycheck group, I would definitely recommend giving budgeting by paycheck a try!
Based on how much you have decided to spend in a particular category, think food, housing, utilities, fun, etc. you then withdraw a month’s worth of cash from the bank. That cash you have withdrawn is then ALL the money you have to spend for the ENTIRE month.
When the money is gone, it’s gone! So you have to make it last for the whole month and not withdraw anymore if you overspend.
It is also important not to borrow from other categories or it will totally throw your budget out of whack. If you have money left over at the end of the month, first of all AWESOME! Second of all, you can either roll than money into the next month or better yet use it to pay off your debt!
The Benefits of Using Cash for Your Budget
The cash envelope system has some MAJOR benefits that are backed by some recent studies. According to these studies, people spend more money when they pay for things with a credit card as compared to cash.
So just by making this one simple change, you will likely spend less money on each trip you make to the store. Eventually, all those savings will add up to potentially be big money.
Plus, cash envelopes will help you stay on track over the course of the month. This is because you will physically see the amount of money in your envelopes going down. Yikes! Seeing the stack of money will (hopefully) help you think twice about your purchasing habits. You will soon find yourself taking time to think about if you really need something before just buying it.
When you spend money on a credit or debit card, the idea of “out of sight out of mind” is working against you. You do NOT want this to be the case with your money.
When you aren’t aware of your spending habits, you are in for a financial disaster sooner or later…probably sooner.
How to Budget Using Cash Envelopes
Step 1: Determine how much you need to spend on each category and if/how you can cut back. If you aren’t sure where you start with this, I have a whole post dedicated to how to budget that you should go check out. Like now, probably…
Step 2: Withdraw the total monthly amount you will need for all categories from the bank. DON’T LOSE IT! The first time I took out all of the money we would need for the whole month, I was quite honestly TERRIFIED! I didn’t lose it, but holy moly, I was worried. So, make sure you keep an eye on that on your way home from the bank.
Step 3: Label an envelope for each category. Dave Ramsey, the creator of the cash envelope system, has some envelopes you can buy, but they are boring. And ugly. And manly. There, I said it.
You can also just use regular old envelopes or check out some of the fun ones I recommend below! I like the fun ones the best because I feel like it is more motivating to use something that you at least enjoy looking at.
Step 4: Divvy up your money based on category. Say you allotted $100 to “fun” spending. Put $100 in the “fun” envelope and so on until you have all the money where it belongs.
Step 5: Spend money from your envelopes accordingly so you don’t run out before the month’s end.
Treat the envelope kind of like a checkbook you need to balance. At the start of the month, write how much you have in the envelope. Then, each time you make a purchase, subtract that amount and write your new total.
Make sure you don’t get in the habit of not tracking your spending or you will probably find you end up with more month than money. Not what you want.
Dave Ramsey’s envelopes, as well as the much more fun ones further below, include a budget tracker either on the envelope or as a paper you can tuck inside. This makes tracking your spending much easier to manage as well.
Who Will Benefit Most from Using Cash Envelopes
If you have a hard time staying on budget, paying down debt, or saving for a rainy day, you are DEFINITELY going to want to consider giving the cash envelope system a try.
It really is one of the best ways to cut overspending and mindless spending and help you get your finances on track once and for all.
If you are pretty good at budgeting but find yourself starting to get more and more off track with each passing month, the cash envelope system can work for you too.
Joel and I had budgeted religiously when I was in grad school. We HAD to or we would run out of money. Then, when I got my first job, we got a bit lazy with our budget. With all the extra money coming in, budgeting didn’t feel as important. Boy, were we wrong!
After a few months though, I noticed our student loans weren’t getting any smaller despite more than doubling our income! What the heck was going on?!
Looking back at our spending, we could see we had just been careless and not as mindful of our spending. It really was the little things that added up to be big fat budget killers!
That’s why we decided to switch to the cash envelopes. Using cash for our budget really helped us to keep a better eye on our spending. It was just the kick we needed to get us back into gear on budgeting and crushing our debt.
Becoming a Master of Your Money
If you feel like not even switching to cash is going to help you get on track financially, I have good news for you. The Master Your Money Bundle is an amazing bundle of personal finance resources that will help you save more, budget better, and kick your debt to the curb once and for all.
It is FILLED with resources from the best in the business of personal finance all designed to help YOU get your money under control. Unlike a lot of the resources I recommend on this site, it isn’t free, but it IS worth it!
If you are already doing pretty well overall and just need the slight boost of using cash, you probably don’t need to spend the money on the Master your Money Bundle.
But if you feel lost, overwhelmed, and hopeless, this bundle just might change your life for the better!
I know you might be thinking “ummm, Kathryn, maybe you didn’t understand but I need to SAVE money, not spend it”. But this is one of those scenarios where spending money to make money is at play.
And educating yourself about finances and knocking out your debt will pay dividends for the rest of your life! No more scouring the internet for bits and pieces of helpful information. This bundle has it all in one convenient place.
When to Ditch the Cash Envelopes
So as you may have gathered by now, I TOTALLY recommend using the cash envelope system and it is awesome. But, we don’t use it anymore. We may go back to it someday if we need the push, but for now we’ve moved away from it and here’s why.
It is definitely less convenient than paying with a card. You have a bulky wallet, have to make sure you take the correct amount of cash to the store, not lose it, etc.
In addition, as a person who treats a credit card like a debit card and pays in full every month, using cash only meant I was missing out on credit card rewards that can go towards free travel or awesome adventure gear.
So, since we were back to staying on track with our budget for a few solid months, Joel and I decided to ditch the cash for the time being. This doesn’t mean we won’t go back to it at a later date, but for now it just isn’t something we need.
That’s the thing about personal finance. It’s personal. You should always be analyzing your finances and making changes and improvements as you go along.
It really isn’t ever something you can stop learning about, because there is always going to be a way to keep improving.
Fun Cash Envelopes That Will Help Keep Your Budget on Track
If you’ve decided to give the cash envelop system a try, here are a few cute envelope options I found. But Amazon has like a zillion more cash options if none of these catch your eye.
Cash Envelope Option #1
I like that there are multiple envelopes in this set so as the tracker gets filled up and/or they are worn out from regular use you already have extra on hand to swap out.
If you are really thrifty though, you could definitely use a pencil to track your spending. That way, at the end of the month, you can erase everything and start over with the same envelope.
This set also comes with an organizer for your purse or at home so you don’t have to worry about losing track of any envelopes which is definitely a good thing!
Cash Envelope Option #2
I think this set of cash envelopes is adorable! I’m a huge fan and would have totally rather had these than my plain old boring ones when I was using cash. Maybe next time around.
Another great thing is that these envelopes are laminated which makes them so much more durable than regular old paper envelopes. That way you won’t have to keep spending money on replacement envelopes when yours wear out.
Cash Envelope Option #3
Next up is one more style of envelope to consider. The thing I like most about these ones is that they have a magnetic closure. This is definitely a pro because then you don’t have to worry about money falling out of your envelopes (eek! Don’t want that!)
I also like the durability of these ones so they aren’t falling apart on you after one month. A definite con is that you can’t as easily change out labels. You could write on them with a permanent marker, but then it is obviously permanent unlike on some of the other envelope options.
These also don’t come with a budget tracker, but it would be pretty easy to make your own. You could even use the free budget template you get as part of my budget email course and tuck it inside your envelopes.
Cash Envelope System Budgeting
While cash envelopes definitely aren’t for everyone, using this system can be awesome for a lot of people! If you feel like you have a failing budget or have ever thought to yourself “man, I just suck with money”, I would encourage you to give this budgeting method a try.
Let me know in the comments if you’ve tried using the cash envelope system for your budget! How did it work for you? Are you still using cash?
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